While stay-at-home advisories and the closing of nonessential businesses have focused recent attention on the hardships of small businesses, the coronavirus outbreak also highlights the financial situations of individuals with low- and moderate-incomes.
“Events are unfolding day by day, but we’re already seeing some people have almost overnight lost their income entirely, depending on the industry,” said Timothy Flacke, executive director of the nonprofit Commonwealth. “And by and large, people are just not in a position to absorb those kinds of shocks.”
Federal bank regulators last month encouraged financial institutions to offer responsible small-dollar lending to help individuals dealing with financial hardships related to the coronavirus, noting that institutions could receive Community Reinvestment Act credit for these loans.
Following the Great Recession, regulatory concerns kept many institutions from offering small-dollar lending, opening up opportunities for high-interest payday lenders.
In response to the current crisis, community banks, credit unions and community development financial institutions (CDFIs) have created unsecured personal loan products with low interest rates.
Eastern Bank last month launched a $2 million Consumer Impact Loan Fund, offering loans of up to $5,000 with no interest or payments due for the first three months.
The bank wanted to create the emergency fund to serve as a bridge for customers applying for unemployment benefits or waiting for funds from other government programs, said Quincy Miller, Eastern Bank’s president.
“We really tried to make this as flexible and affordable as possible to get them through that window,” Miller said. “Customers have a total of 27 months to repay the loan, so they don’t have to choose between paying this loan or a mortgage payment.”
Interest after the first three months is 3.99 percent, lower than the double-digit rates for credit cards and some unsecured loans.
Massachusetts credit unions have also been offering low-interest personal loans of up to 12 to 24 months, according to a statement from the Cooperative Credit Union Association. Among them is Chelsea-based Metro Credit Union, which is offering 12-month hardship loans up to $1,500 with no payments or interest for 60 days, followed by interest at 6 percent.
Even before the coronavirus crisis, many CDFIs provided low- moderate-income individuals with access to personal loans. The Capital Good Fund, a CDFI offering unsecured loans in several states including Massachusetts and Rhode Island, recently launched a Crisis Relief Fund.
“We wanted to create something that would address the fact that people are going to need money for working credit on a personal basis just to cover expenses,” said Andy Posner, The Capital Good Fund’s founder and CEO, “and that recognizes that people aren’t going to be able to start paying for a while.”
Unlike most of The Capital Good Fund’s loans, which are designated for specific purposes, crisis loans can be taken for any reason, Posner said. They range from $300 to $1,500 with payment deferrals for three months, followed by 12 months of interest and principal payments. The interest rate is 5 percent, and the loan is reported to credit bureaus so consumers can continue to build credit.
Posner said the Capital Good Fund raised grant dollars to support loan loss reserves assuming a default rate of 25 percent, though he doesn’t expect the default rate to reach that high.
Flacke, with Commonwealth, a Boston-based organization that works on programs nationwide to promote financial security, said personal loans are an important tool to help people through this crisis, but they can be expensive for consumers.
“Anybody who borrows is going to have to repay, so when you think of that at the macro-scale, I would imagine we’re going to have our hands full coming out of this recovery,” Flacke said. “Where possible, we’d rather not have people starting from a place of deficit.”
