A growing number of Mainers who need to cover unexpected medical expenses or replace a worn-out washer-dryer are turning to high-interest alternative credit, including pawnshop loans, rent-to-own contracts and payday loans. Though these products can help a low-income person in a time of need, the price for this level of convenience can be hefty. The public and the private sectors can and should collaborate to ensure that consumers have access to thorough financial education and better lending options. Otherwise, too many Maine residents will remain caught in the debt trap.

The scope of Mainers’ usage of alternative credit was revealed in a recently released Federal Reserve Bank of Boston analysis. From July 2010 to June 2011, 7.5 percent of Maine households used alternative financial services — 25 percent more than the U.S. average and nearly double the rate in New England. The principal reason for the high demand? The high percentage of households with an annual income between $15,000 and $30,000.

The most popular form of alternative credit in Maine — the rent-to-own store — allows customers to obtain items immediately by agreeing to make regular payments over a set period of weeks. Then there are payday loans, which are meant to be repaid out of the borrower’s next paycheck but often get rolled over. And then there’s the pawnshop, where a consumer leaves an item like a piece of jewelry or a computer as collateral on a loan equal to a percentage of the item’s value. All of these options entail high interest rates — up to 300 percent a year — which leave the consumer paying back far more than he or she borrowed in the first place.

Granted, people who borrow money should be aware of the obligations that they’re incurring. But financial literacy is generally low in the United States, with poorer households — those targeted for payday loans and the like — less likely to be informed than their more-well-off peers. Last year, Maine revised high school diploma requirements to include personal finance coursework within mandated social studies or history classes. That’s a step in the right direction, though financial literacy scholars say this approach isn’t effective as a standalone financial literacy class.

Low-income consumers also need a wider choice of responsible lending options. Across the country, nonprofits, local government agencies, banks and credit unions have joined forces to offer low-cost accounts, eventually enabling customers to build a credit history and access more affordable credit sources. Another approach being tried is the lending circle. Participants contribute a certain amount of money to a pool and can borrow from it when necessary, repaying the loan over time.

The popularity of alternative credit in Maine represents a crisis but not an insurmountable one. A public-private sector effort, building on research into small-dollar lending options, presents an opportunity to help struggling Mainers better manage their money — and it’s an opportunity the state can’t afford to pass up.


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