Although most consumer analysts recommend against consumers taking out payday loans, the State of Virginia has decided to encourage consumers to take out payday loans, especially the ones offered by its state government.
The state of Virginia is hoping to compete with smaller institutions and large banks that offer payday loans, such as Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and others. In a recent interview, Virginia Governor Tim Kaine said, “Hey if Virginia can do it, Exxon Mobile could do it, Citibank could do it, Walmart could do it, the government of California could do it, any employer could do this for their employees.”
Virginia is hoping to generate additional state revenue by charging state employees a 24% interest rate to borrow against their paycheck ahead of time. Typically payday loan companies charge consumers between 400% and 800% interest on the loans that they offer.
Borrowers have to pass a financial literacy test before getting a loan. The state does not have to worry about loans being paid back since the repayments are withdrawn directly from borrowers’ paychecks.
Kaine has said that Virginia breaks even with the loans after factoring in administrative costs. He believes it’s a benefit for consumers because they offer better interest rates than private options do and believes that it’s a model that other governments or private employers should look at.
During the first year, about 3,000 state employees participated in the program.
