Payday Lenders Are Somehow Even Worse Than ‘Dirty Money’ Makes Them Look
Our Consumer Financial Protection Board founded by then Elizabeth Warren while President Obama was sitting at 1600 Pennsylvania Avenue
The CFPB is now under serious attack by The Trump Administration which wants to unleash the vultures onto our community. All efforts to regulate these payday lenders are now being rolled back or completely removed. Our community is in desperate trouble because a majority of urban enclaves use payday lenders to fill that financial gap when emergencies arise.
Payday lenders — which often spring up in storefronts strip malls and other areas where they can be easily accessed by car or bus — allow borrowers to take out small amount of cash for a short period of time. The idea behind them is relatively simple: You know you’ve got money coming but you don’t have it yet. Rent is due, you’ve just blown a tire, or an unexpected medical procedure has come up. Payday loans offer to bridge the gap, just until you get paid.
For the uninitiated, this may seem like a decent service — and indeed, these short-term loans, which often advertise their ability to help people out between paychecks, do serve as a valuable resource to some customers. In an unforgiving economy with a withering social safety net, the ability to get cash quick can be very appealing; there’s a reason that an estimated 12 million Americans will use a payday lender this year.
The problems begin mounting, though, when borrowers go to pay back their loans and are surprised with huge interest rates and additional fees which ultimately make it impossible to dig themselves out of the hole.
The Consumer Financial Protection Bureau estimates that the average payday loan is under $500; the Pew Charitable Trust finds that it’s even lower, just $375. But most borrowers take out multiple loans each year, becoming stuck in a cycle of as many as eight to 12 instances of borrowing annually.
Three-quarters of payday loans come from storefronts, with an average fee of $55 per loan, and roughly one-quarter originate online, with an average fee of $95. Using these figures, we calculate that the average borrower spends about $520 on interest each year.
Spending more than $520 on interest alone sounds dramatic, but that’s averaged across the country. Payday lenders are permitted to operate in more than half of U.S. states with varying degrees of flexibility; because the federal government has been relatively lax on payday lenders, it’s up to the states to regulate how much they can charge in interest and fees.
As a result, a borrower in a state like Oklahoma can pay up to 390% APR for a 14-day $100 loan, while in Kentucky, the APR is 459%. A traditional line of credit typically comes with an APR of around 14% to 22%.
The same $500 storefront loan would generally cost about $55 in Florida, $75 in Nebraska, $87.50 in Alabama, and $100 in Texas, even if it were provided by the same national company in all of those states.
On average, most borrowers end up paying a substantial amount for their loan; one 2012 report from the Consumer Federation of America found that “by the time loans are written off by the lender, borrowers have repaid fees equaling about 90% of their initial loan principal but are counted as defaults for the full amount of the loan.” More than half of borrowers — 55% — were found to have defaulted in the first year.
Who Uses Payday Lenders (and Why)
On paper, this math looks plainly problematic. But in practice, payday lending often feels like a lifeline to the small number of people who borrow each year.
In spite of the fact that most Americans do not have $1,000 in savings in the event of an emergency, many do have access to the cash they’d need, either by borrowing from friends, getting an advance at work, or drawing on other resources. Payday lenders, however, rely on those who have neither the cash nor the access — i.e., those who are from historically and systemically marginalized groups.
Borrowers are typically on the younger side — between 25 and 29 — and are overwhelmingly renters who have at least a high school education or some college, and earn below $30,000 per year. The biggest share are not unemployed; instead, they’re on disability, and often need cash assistance between their payments. African-Americans are three times more likely than whites to utilize these services.
This is not accidental; in fact, it’s the result of clever targeting by lenders. Numerous studies have found that payday lenders actively cluster around Black and Latino neighborhoods—neighborhoods whose residents are less likely to have access to generational wealth due to decades of systemic economic oppression.
Essentially, if you can’t borrow money from family and you don’t have savings, you’re going to need to head to MoneyTree.
The payday lenders and their (mostly conservative, mostly wealthy, mostly white, mostly male) defenders cite the clear demand and the demonstrated market value of these services and paint any regulations as “government overreach.” They argue that if people are showing that they want this service, why curtail it with regulations?
Someone who has never had to use a payday lender — which, statistically, is about 95% of the adult population, though in some states it’s more like 82% — might ask why anyone would use a service that is so clearly a bad deal for the borrower.
The answer is not simple, but it is, in many ways, understandable. It’s no surprise that people are using payday lenders — and that those who use them, use them often—considering the niche market they have created…and the yawning chasm of wealth inequality in the United States.
Payday lending offers a service that virtually no other institution in the United States does — quick money, when you need it, in relatively small amounts. Personal bank loans, government assistance, and nonprofit aid are rarely speedy and usually require a lot of leg work. And, in the instance of a bank loan or a line of credit, the borrower is required to have demonstrable income, decent credit, and any number of other necessary qualifications (including citizenship papers and paystubs).
In the United States, if a person is going to be short on rent on the 1st and they don’t get paid until the 5th, there is very, very little that they can do aside from borrow money, either from someone they know or from an organization that will lend it. And let’s not forget that a lot of Americans are in this exact situation; a reported 78% said, in 2017, that they lived paycheck to paycheck.
Meanwhile, the payday lending industry continues to rake in cash and rack up wins.