Impact InvestingRacial Equity

Human centered alternatives to predatory loans support workers and families

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Systemic racism and discrimination in the asset management industry and broader economy have restricted economic agency to a few, perpetuating racial and economic inequity and preventing communities of color from accessing opportunities for wealth building in employment, business ownership, housing and more.

That’s why the W.K. Kellogg Foundation invests capital into fund managers and entrepreneurs who have the talent, business insight and lived experience to advance racial equity and access overlooked opportunities to create financial and social returns.

Our Mission Driven Investment portfolio investees and partners are changing the narrative and disrupting the system to build an economy that’s truly inclusive of all.

High-cost payday loans trap consumers in unrelenting debt, stripping wealth and threatening borrowers’ economic stability with annual interest rates that average 391%. Still, every year 12 million Americans turn to predatory payday loans because they offer quick, small injections of cash when it’s needed versus waiting for scheduled paydays. Low-income individuals constitute the bulk of the borrowers, spending an average of $520 in fees to repeatedly borrow $375.

Behind these high-interest loans are everyday people — teachers buying school supplies for their students, cash-strapped parents needing car repairs and many others looking for short-term economic relief.

12 million Americans turn to predatory loans annually for quick, small injections of cash when it’s needed versus waiting for scheduled paydays.

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average annual interest rate
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in fees for $375 in loans
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Texas has the highest payday loan interest rates in the U.S.

In Texas, where payday loan interest rates are the highest in the country, the Rio Grande Valley Multibank (RGVMB) created a safe and equally convenient alternative: an employer-based loan product repayable through payroll deductions. Eligible employees can borrow up to $1,000 and receive free financial counseling.

RGVMB offers these affordable loans through its Community Loan Center (CLC), a nonprofit franchise model that uses proprietary software to minimize administrative costs, enabling other community-based organizations to originate loans for employees. The result is a sustainable, scalable model for responsible, affordable lending. According to RGVMB, CLC borrowers save about $775 per loan compared to the cost of borrowing the same amount using the typical payday loan in Texas.

Addressing the cycles of stress for low-wage workers

“As an employer, we know that our employees don’t work as well when they are worried about things outside of the office or have to miss work to deal with something personal. By offering these loans we can help our employees feel more peace of mind at work, which helps with attendance and productivity. But also, the loans are a way for us to help make sure our employees aren’t taken advantage of by unscrupulous lenders. Everyone in our community benefits from that.”

Jaime Martinez, director of human resources, Port of Brownsville, Texas

Since its founding in 2011, the CLC has loaned nearly $82 million to more than 85,000 low-wage workers by partnering with employers in nine states and 19 different markets. Sixty percent of borrowers are women, 86% are people of color and nearly all earn less than 200% of the federal poverty level, about $53,000 for a family of four.

In a typical year, CLC loan requests tend to follow a predictable cycle, spiking before the start of the school year and again around the winter holidays, when one-off expenses such as clothes, school supplies and gifts may exceed monthly budgets. Applications then dip during tax season, when many borrowers receive a tax refund, stabilize throughout the summer and rise again when school resumes, illustrating the failure of many low-wage salaries to cover even modest needs.

These cycles of stress are more volatile during the pandemic. Recent data have shown that these trends are likely shifting with the waves of federal economic relief. Consequently, upticks in the use of payday loans will happen as stimulus payments, unemployment benefits and other temporary assistance expire.

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low-wage workers
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of borrowers <br>are people of color

$7.75 M in potential savings for borrowers over 10-years

A Long-Term Investment with Rippling Effects

The W.K. Kellogg Foundation provided a $1 million program-related investment (PRI) in the CLC program in 2017. The 10-year, unsecured loan with a 1% interest rate, will finance at least 10,000 loans and reduces RGVMB’s cost of capital to ensure borrowers an affordable interest rate. As loans regenerate each year, this PRI has the potential to save borrowers more than $7.75 million during the 10-year investment period as well as leverage more capital from commercial banks, the public sector and peer foundations to support similar products.

Program-related investments (PRIs) fill gaps in the capital markets, and provide the flexibility often needed to catalyze capital into high impact.

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