Virginia Offers Small Loans to State Employees
Since now I am working in the DC area and will soon be a resident of Virginia, I started to tune my radio to news stations in this area. Early this week on my way back from work, this piece of news got my attention. Virginia Governor announced on Monday that the state is setting up a Virginia State Employee Loan Program to help eligible state employees go through the tough economic time by lending them small, short-term loans from $100 to $500. The purpose for establishing this program, in partner with Virginia Credit Union (VACU), is to keep financially stressed Virginia state employees away from predatory lenders, such as payday loan stores.
To qualify for the loan, the applicant must be a VA state employee who is not on probation and a member of VACU with good standing. Even though there will be no credit check to determine the borrower’s credit worthiness, he or she needs to complete an “on-line financial fitness course and exam to keep them on sound financial footing” before being approved for the loan. While I believe the program is good for those need financial help in a difficult time, I am not impressive by the program itself for a couple of reasons.
First, I am not sure how much $100 or even $500 can help. Sure, the loan may be enough if one wants to buy back-to-school stuff for his/her kid(s), but he or she has problem making monthly mortgage payment, then the money probably won’t provide too much relief, even in the short-term. And according to the program, one can only have one loan at a time and a maximum of two loans within a year. Will that be helpful?
Second, the interest rate of the loan is not favorable at all. At 24.99% APR, the interest rate is more than 10 percentage points higher than the average consumer credit card rate, which is at 14.69% in June according to IndexCreditCards.com. People are outraged by the credit card industry’s practice of charging high interest rates even on those with good credit (hence the CARD Act of 2009), but I doubt there will be many complains about the interest charge. Sure, 24.99% is better than what payday loan shops will charge, but I don’t think I will use it if I want a few hundred dollars for an urgent need. Charging less than payday loans do won’t make it a good program. In my opinion, it’s just less bad.
In fact, I think there are better options out there, if only looking the money part of the program. The first comes up in my mind is borrowing money from credit cards. This idea may sound crazy with all negative coverage of the credit card industry recently, but it could be a valid option for those who use their credit cards responsively. I considered using credit cards as emergency fund myself when I lost my job two years ago. What I would do with this method is that I would get a couple of new credit cards with 0% APR balance transfer (now cards with 0% APR balance transfer are rare, but you can still find cards such as Citibank Forward Card and Discover Escape Card come with 6-months 0% APR balance transfer offer), then I would deposit the money into my bank account and use the money to pay my daily expenses. Usually credit card issuers will charge 3% fee with no maximum on the amount of balance transfterred (put the money in a savings account that pays 2.00% APY can offset a large part of the balance transfer fee), which can last from 6 months to one year, but the interest rate is much lower than the 24.99% charged by the Virginia State Employee Loan Program. Of course, there are risks involved in this approach:
- You may not get the credit cards you want, depending on your credit history;
- The credit limit you get may not be high enough since issuers have been very aggressive in reducing credit limit and closing inactive accounts;
- You have to make at least minimum monthly payment in order to maintain the 0% APR; otherwise, you will end up paying the same interest rate or even higher if you miss one payment;
- Getting a new credit may affect your credit score negatively.
In general, you have to be very careful when borrowing money from credit cards. Don’t use it unless you can manage your credit cards very well (read more on how to transfer credit card balance).
Another option, which I think makes a better alternative, is using social lending to fund short-term project. Comparing to the credit card method I mentioned above, peer-to-peer lending is new, but gained a lot of attention recently as banks tighten their lending due to the financial crisis. Lending Club is one of the P2P lending providers that I am using. Even though I am using Lending Club as a lender, not a borrower, people who borrow money from private lenders through Lending Club can get better rate on average as comparing to borrowing money from banks. For example, depending on the borrower’s credit, interest rates of P2P loans can be as low as 7.37% APR for top rated borrowers. Even for people with less than perfect credit, the interest rates, at the maximum of 20.11% for G graded loans, are still significantly lower than the Virginia program’s interest rate. And with Lending Club, the loan duration can be up to 36 months. Longer duration means lower monthly payment, making it easier for borrowers to pay back the loan.
Even though there are alternatives available for people to borrow a small amount of money at relatively low rate, the Virginia program is still worth considering for those who are in need because 1) the requirements are rather low (not on probation and at least $5 in VACU checking account) and it doesn’t require a credit check; 2) applicants must take a financial course and an exam before being approved for the loan, which could be beneficial to the applicants in the long-term.
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