Do you have trouble getting approved for loans or finding banks that will work with you? If so, a Community Development Financial Institution (CDFI) could be the solution.
CDFIs help people who are often overlooked by traditional banks. These financial organizations offer products for individuals and small businesses who come from distressed communities, or who don’t have enough income, credit, or collateral to qualify for loans.
What is a Community Development Financial Institution (CDFI)?
CDFIs are financial organizations that work to create economic opportunities in their local communities. They do this by offering low-interest loans and other support to people who may have trouble accessing traditional loans and banking services.
They also fund organizations that create jobs and build affordable housing. Depending on the CDFI, other services offered may include financial education, business coaching, and credit coaching.
There are currently more than 1,400 certified CDFIs in the U.S.
Who do CDFIs serve?
CDFIs primarily serve people who are financially distressed or who have limited access to banking services. According to Opportunity Finance Network (OFN), a network of nearly 500 CDFIs, the main areas where CDFIs work are rural, urban, and native communities. The types of development they support include:
In terms of clientele, the people who primarily work with CDFIs are those who have limited incomes (82%), are clients of color (68%), and women (52%).
Read more: What does it mean to be ‘unbanked,’ and what are the costs?
What types of institutions can be CDFIs?
There are four different types of CFDIs, all with different structures but similar missions:
CD banks: For-profit banks that lend money to and invest in economically distressed communities. These banks are required to target at least 60% of their financing to low-income clients and underserved communities.
CD credit unions: CD credit unions are nonprofit, member-owned financial institutions that provide lending and savings products for low- and moderate-income clients and minority communities.
CD loan funds: These are by far the most common type of CDFIs, and they’re usually nonprofits. Loan funds mainly provide loans for microenterprises, small businesses, and organizations that support housing and community service.
CD venture capital funds: Either for-profit or nonprofit agencies that invest in small and medium-sized businesses. Their goal is a “double bottom line” of both earning financial returns and benefiting the communities they serve.
What products and services do CDFIs offer?
Each CDFI has something unique to offer to their community. While CD loan funds and venture capital funds mainly serve businesses, CD banks and credit unions work with both businesses and individuals.
Depending on the CDFI, they may offer one one or more of the following services:
CDFI vs. banks and credit unions
CDFIs are different from traditional banks and credit unions when it comes to their focus and who they serve. Here’s what makes them different:
CDFIs: These organizations support economic development and serve people who don’t typically qualify for traditional banking services.
Banks: Traditional banks (or non-CD banks) work with the general public and they focus on generating profits for their shareholders.
Credit unions: Credit unions are similar to CFDIs in that they often invest in their local communities. Credit unions are member-owned nonprofits and they return their profits to members through lower interest rates and higher savings rates than the average bank. Nearly 500 credit unions are CDFIs.
Read more: Credit union vs. bank: Which is right for you?
One of the main differences you’ll find between CDFIs and other financial institutions is more flexible loan qualifications and lower interest rates on loans.
While the best personal loans for bad credit come with rates as high as 35.99%, you can find CDFI lenders with much lower rate caps. For example, Hope Credit Union has personal loans that max out at 18% interest and Self-Help Credit Union’s personal loans come with maximum rates of 16%.
CDFI vs. Community Development Entity (CDE)
Community Development Entities (CDE) are corporations or partnerships that invest in low-income communities. CDEs are not the same as CDFIs, but they often work with CDFIs and they lend money to community development organizations. CFEs are also required to be certified through the CDFI Fund.
Who should consider a CDFI?
If you’re struggling to qualify for a personal loan or mortgage, or you’re a business owner who needs access to capital, you should consider working with a CDFI. You can also go to a CDFI if you need other business support beyond loans, or you want help doing things like improving your credit.
CDFIs aim to make loan funds more accessible to people in your shoes, especially if you have limited income or you come from a distressed community.
How to find and evaluate a CDFI
There are a couple of ways to find a CDFI. You can use the Opportunity Finance Network’s free CDFI Locator tool, or use the CDFI Fund’s Searchable Awards Database to find organizations in your state that have received CDFI funds.
Before you work with a CDFI, just make sure you evaluate them by checking into the following details:
Certification: Use one of the links above to ensure the organization is certified.
Insurance: For CD banks and credit unions, make sure they have either FDIC or NCUA insurance to protect your deposits.
Products and services: Check the CDFIs website to find out what products and services they provide. For loan products, make sure the loan terms are transparent and the interest rates are competitive.
Free resources: Check to see if they have complimentary resources you might use, like coaching or education.
Reports: Review their most recent annual report to learn about how their work is impacting the community.
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