Tackling the problem of payday lending
Posted 7.13.15Dean Karabogias, EMBA '14, works to eliminate the heavy debt burden of payday lending and its effect on society by partnering with employers to offer alternative lending solutions.
Dean Karabogias, EMBA '14, saw his first homeless person as a child, walking on a street in downtown Cleveland with his father. His dad asked him how he thought that man had become homeless, and Karabogias cited reasons that come to mind for many people: lack of college education, lack of intellect, and laziness.
His dad shook his head and told his son that the main reasons a person ends up homeless are mental illness and lack of family support. Karabogias finds echoes of this message in his work with the Business of Good Foundation, where breaking down stereotypes and educating people about money and support happens every day.
After a 20-year career on Wall Street, Karabogias went back to school for his executive MBA at the Weatherhead School of Management at Case Western Reserve University. His goal had been to figure out what he would do now, after being on Wall Street, but instead his question became, “How can I use what I learned on Wall Street and apply it to everyday business, for good?”
Karabogias now serves as a director in Northeast Ohio’s Business of Good Foundation. His mission is to connect with employers around the region in order to share with them the story of payday lending and what it is doing to companies’ employees.
Payday lending is a $70 billion a year business. Like his own early preconceived notions about homelessness, Karabogias is working hard to break down barriers and educate employers about who it is, exactly, that uses payday lending. “The majority of people who use payday lending are not necessarily the poor or minorities,” Karabogias explains, “They are single white mothers. They are people who do not have family or friends to help support them financially. I’ve watched who goes in and out of payday lending places, and many are dressed in the scrubs of nursing.”
According to the 2012 Pew research report, “Payday Lending in America: Who Borrows, Where They Borrow, and Why,” 12 million American adults use payday loans annually. “Most payday loan borrowers are white, female, and 25 to 44 years old.” The problem is broader than just this demographic, however. There are five groups that have higher odds of using payday loans: “those without a four-year college degree, home renters, African Americans, those earning below $40,000 annually, and those who are separated or divorced.”
The average borrower takes out eight payday loans a year, spending $520 on interest with an average loan size of $375. The interest fees on these short loans equal out to 391% APR. The burden of debt on an individual who generally takes out these loans to cover every day shortfalls rather than unexpected expenses is significant.
Karabogias has partnered with other local NGOs like David Rothstein of Neighborhood Housing Services of Greater Cleveland and Towards Employment. He is currently reaching out to the NAACP and the Urban League as well in order to build up credibility. Karabogias is also meeting with businesses to demonstrate how alternative lending solutions enlighten rather than burden people with debt. His goal is to let capitalism and the marketplace take care of the problem of payday lending by offering a more appealing alternative lending solution, one that not only decreases the burden of debt on an employee but also serves to educate and counsel people to make better financial decisions.
Karabogias sees employers as key to helping this situation. Just as it is in the best interests of employers to look out for and help educate employees on physical wellness, it is also in their best interests to help their employees with their financial wellness. Helping to relieve the stress and spiral of financial indebtedness will improve employees’ overall wellbeing and performance when they’re on the clock.
The alternative lending solution the Business of Good Foundation partners with is Employee Loan Solutions, or ELS. Employee Loan Solutions is a revolutionary financial wellness program where employees can access responsible small credit securely and conveniently as part of their voluntary benefit package. The program costs employers nothing to offer and serves an important need.
In contrast to the payday lending business, which requires payback of loan within two weeks at very high interest rates, ELS provides a one-year loan that amortizes over 12 months of automatic payroll deductions. ELS also offers a financial counselor and educational materials to help the borrower learn financial management. The goal of ELS and the Business of Good Foundation is to educate employees on how to better manage their finances so that individuals no longer have to rely on these short-term loans and are able to stand on solid financial ground.
The Business of Good Foundation has already forged alliances with municipalities around the country including the City of Anaheim, Cuyahoga Falls, and Houston and is working hard to connect with other cities and businesses.
Initial customer survey results from the City of Anaheim have been overwhelmingly positive. Between the initial launch on April 15 and June 1, 41 employees took TrueConnect loans, 32 of which were for the maximum $2,000 loan amount. This is with virtually no internal marketing done by the Anaheim HR department other than including the weblink in one monthly internal email that is sent from HR to all employees every month. Several more trickle in every day.
Karabogias sees the alternative lending solution as one that turns the chronic payday lending situation into a one-time visit. “With any hope,” Karabogias says, “We’ll put ourselves—and payday lending—out of business.”
To learn more about Business of Good Foundation, visit www.thebusinessofgood.org.
Weatherhead School of Management believes in business as an agent of world benefit. Our students and alumni are bringing positive change to every corner of the globe. Learn more about the executive MBA program and our other degree programs, and take the next steps in furthering your career goals.