Virginia has given almost 2,800 loans to state employees — at a nearly 25 percent interest rate — through a program the governor is touting as a model to combat predatory lending.
The loans, totaling $1.37 million, have been handed out under the Virginia State Employee Loan Program, which was created in July as a way for state employees to account for short-term money problems without turning to payday lenders and breaking the bank.
“The results of the Virginia State Employee Loan Program suggest that if individuals are offered an alternative to predatory loans, they take it,” outgoing Gov. Tim Kaine wrote in an opinion piece for the Wall Street Journal.
At a 24.99 percent interest rate, the employee loans are not as wallet-draining as traditional payday loans that can eclipse 300 percent, but still can cost more than those offered by some credit institutions.
State employees can borrow between $100 and $500, and the repayment is taken from their paychecks over six months. Employees must take a financial literacy test and become a member of the Virginia Credit Union. Borrowers can take out one loan at a time and are restricted to two per year.
Last year, the General Assembly capped payday interest rates at 36 percent, but critics said additional fees had the potential to lift the total interest to 300 percent.
The employee loan program, state officials say, is another attempt to root out financial assistance that is more trouble than it’s worth.
“Your credit card is probably around there,” Gordon Hickey, the governor’s spokesman, said of the interest rate. “It’s not exorbitant. You can’t get a loan like that from a bank.”
He added the 25 percent rate was to ensure the state would break even on the transactions.
Kaine has said the program could become a model for businesses and governments, but similar programs are not imminent locally.Hickey said Virginia was the first state to employ such a system.
“It’s certainly new to me,” said Shaun Adamec, Maryland Gov. Martin O’Malley’s spokesman, adding he did not know of any plans to pursue a similar program in Maryland.
Jay Speer, executive director of Virginians Against Payday Loans — made up of businesses, consumer advocates and faith-based groups opposed to such loans — endorsed Kaine’s program, saying it was a mistake to categorize it as a payday loan.
“It’s a small-dollar loan that’s intended to help,” he said. “They’re not trying to trap you.”
He said the lower interest rate and incremental nature of payments distinguished it from the types of loans he has crusaded against.
