Nonprofit Payday Loans? Yes, to Mixed Reviews

APPLETON, Wis. - This city of 70,000 has five McDonald's franchises, three Pizza Huts, four Starbucks shops - and 19 payday loan stores, brightly lighted storefronts with names like EZ Money and Check Into Cash that offer two-week loans without credit checks.

Skip to next paragraph Kevin J. Miyazaki for The New York Times

Peggy Truckey found help in one of the nonprofit loans, which have not been immune to critics.

Peggy Truckey, 53, knows the allure. Last year she owed nearly ,300 to four of those stores, and was paying about 0 a month in finance fees alone. "I thought I was going to have to take a second job just to pay off the interest," Ms. Truckey said.

Then she heard about a new nonprofit program operated out of a Goodwill thrift store, one of several hundred lower-cost payday loan products that are now being tried by credit unions around the country. She got a payday loan, at half the finance charge, but also something more: help converting all her two-week payday debts, which charged the equivalent of more than 500 percent annual interest, to a one-year loan at 18.9 percent, bringing her monthly payments down to a manageable 9. A few dollars from each payment go into a savings account, the first she has had in years.

"I have almost 0 in savings," said Ms. Truckey, who earns .50 an hour as a supermarket meat clerk. "I'm in a comfortable position for the first time in many years."

The program, GoodMoney, a collaboration between Goodwill and Prospera Credit Union, is a response to an industry that has been criticized by lawmakers and consumer advocates as predatory but that has reached as many as one in 20 Americans.

"Our goal is to change behavior, to interrupt the cycle of debt," said Ken Eiden, president of Prospera, who is also a director at Goodwill.

For Ms. Truckey, as for most payday borrowers, the loans began as a stopgap. After losing her job in 2002 she borrowed 0 from a payday store, which charged per two weeks for every 0 borrowed, or the equivalent of 572 percent annual interest. When the loan came due in two weeks, she could repay only the 0 finance charge, so she rolled the loan over, adding another finance charge.

Soon she took a second loan, from another store, and eventually two more, which she rolled over every two weeks, multiplying the cost of the loans. Even after she found a full-time job, she said, "I wasn't able to pay my electric bill on time or my other bills on time, because half my paycheck was going to finance charges."

At GoodMoney, tellers encourage borrowers to consolidate their debt in lower-interest term loans, and to use other credit union services like automatic savings. If borrowers cannot repay a loan after rolling it over twice, they can get the loan interest-free by attending a free credit counseling session with a nonprofit service.

But alternative payday loans have also drawn criticism from some consumer advocates, who say the programs are too similar to for-profit payday loans, especially when they call for the principal to be repaid in two weeks. At GoodMoney, for example, borrowers pay .90 for every 0 they borrow, which translates to an annual rate of 252 percent.

That may be roughly half the rate offered by commercial payday lenders, but "it's still the same debt trap," said Uriah King, a policy associate at the Center for Responsible Lending, a nonprofit advocacy group that is critical of payday lending. Even with the lower finance fees, Mr. King said, most borrowers have to roll the loans over.

According to Prospera, 62 percent of GoodMoney users took fewer than the industry average of seven loans for the 12-month period ended July. The median user at GoodMoney took four loans.

Payday loan stores, which barely existed 15 years ago, now outnumber most fast-food franchises. Typically a customer borrows a few hundred dollars in exchange for a check, postdated to the next payday, made out in the amount of the principal plus a fee of to per 0 borrowed.

Usury laws in 12 states, including New York, prohibit or severely regulate payday lending. But while critics, including some lawmakers, call the stores predatory lenders that trap borrowers in ever-deeper cycles of debt, consumers flock to their easy, short-term loans, offered with no credit checks.

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