Job losses in the U.S. may be in the process of bottoming, but the employment market is surely nowhere near being healthy yet. So, it's not surprising that innumerable people find themselves lacking the cash to make even the most basic purchases or pay their usual monthly bills.

That's why "money stores" that provide short-term loans by using car or jewelry as collateral have become enticing to Americans who need funds to cover necessities -- especially when their credit card limits have been cut, they're unable to get a traditional bank loan or they even lack any bank account at all.

Most people who turn to such short-term credit sources do so to "cover recurring expenses like rent, food or bills . . . and to cover home mortgage payments," according to a survey by the nonprofit Texas Appleseed. And yet, top federal regulators warn that people who use these loans repeatedly can end up in serious financial hardship because the loans come with such high interest rates.

Small Storms Become Big Storms


So, what are people to do? Being in a financial tight spot is fraught with difficulty, but there are a few options to consider. Active initiatives are now available from both governmental and nonprofit groups.

For instance, Joshua Reynolds runs a program at nonprofit organization Family Services of Greater Houston, which makes auto-title loans and offers low-cost alternatives to payday loans (in which a working person's next paycheck serves as the collateral). "A lot of our clients don't have the cushion to weather small storms, but those become big storms when they take out high-cost loans," says Reynolds, a vice president of emerging programs at the nonprofit. His group writes loans with annual rates that average around 8%, compared with effective annual percentage rates of 300% to 500% or more for typical money-store loans.

The group works closely with each borrower to ensure that he or she has the income to make repayments, and it helps the borrower budget a monthly payment schedule. Instead of writing out a short-term loan that most people cannot pay back in a month's time, Family Services of Greater Houston will make a $5,000 car loan, for example, for around a two-year term with a $200-a-month payment. Financial coaching is mandatory for anyone who takes out these loans. "We want to break the cycle and help them build savings for future emergencies."

Reynolds says in his experience, each borrower his group works with wants to repay loans and to improve credit. So far, the group has made just under 2,000 loans, and its experience has been heartening. "Nine out of 10 borrowers successfully complete their loan," he says.

Affordable Loans From Banks

Another network that borrowers can tap into is a pilot Federal Deposit Insurance Corp. small-loan program, which ends in October 2010. The program has 30 participating banks in several states and is intended to identify effective and replicable business practices to help banks incorporate affordable small loans into their mainstream services.

"Banks are well positioned to offer small-dollar loans at greatly reduced costs and help their customers build savings in the process," said FDIC Chair Sheila Bair in a recent speech. In this program, people can get loans up to $1,000 with annual percentage rates below 36% and no prepayment penalties.

Bair has also shone a light on Americans who are "unbanked" or "underbanked." Last year, she released a survey that showed over a quarter, or 25.6%, of all households either have no checking or savings account, or have a bank account but still choose to rely regularly on alternative lenders such as payday loan stores and pawnshops.

"These stores lure people in by making such things as money orders much cheaper than banks," says Anthony Santiago, chief operating officer of Newark Now, a program that aims to improve the industrial city in New Jersey. "Many landlords only accept money orders for rent, and people need the service cheap. It's as simple as that."

"An Opportunity to Get a Second Start"


Since the FDIC released its report, several states and cities have joined a program called "Bank On" to get the unbanked to open accounts. For example, banks that have signed up in the Newark effort offer people one free money order a month, and they're making financial education a key component of the initiative. "It's an opportunity to get a second start, act responsibly and learn to save for unforeseen expenses," says Santiago.

The program has different components in different cities and has also been adopted by Seattle, California, Illinois, Denver and St. Petersburg, Fla., among others.

Other initiatives have been launched elsewhere. Lyn Haralson, a community affairs specialist for the Federal Reserve Bank of St. Louis, has been instrumental in developing an alternative payday loan program in Arkansas. The group, called Arkansans Against Abusive Payday Lending is a coalition of 36 consumer, military and faith-based organizations in the state.

It offers a loan of up to $500 with no application fee, and the interest rate doesn't exceed 17% a year. Borrowers are given free financial counseling. And they're also loaned an additional 100% of their loan that gets deposited into an interest-bearing savings account, as a first step toward a healthier financial life. The six- to 12-month repayment term is much more liberal than traditional payday loans, which require payment in full by the next paycheck.

It Pays to Do Some Homework

It's also worth reading fact sheet on alternatives to payday loans that the independent consumer advocacy group Consumers Union publishes. It advises, among other things, that consumers try to get an advance from employers to meet short-term cash needs.

Despite the pressure felt by people in dire financial straits, running into the first money store they see shouldn't be their first move because other options are often available. The extra homework will save people from getting into a bind that's hard to get out of, as others have found.

Editor's Note: This is the last in a series of stories about money stores and payday lending that DailyFinance has published from March 9-12. On Tuesday, the first two stories concerned the payday lending industry's growth during the Great Recession and how a Texas retiree wound up with a 375% loan for $4,000. On Wednesday, we looked at how several cities in Texas are restricting the spread of money stores in their towns. Thursday's story examined Congress's lost zeal for regulating payday lenders. And this final installment reviews some alternatives to payday loans for folks who find themselves strapped for cash.

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