Payday lenders make their money by keeping borrowers in debt.
It’s no secret that these dangerous, high-cost loans keep too many Americans — 12 million of us, in fact — in debt each year. The average payday borrower takes out 10 loans per year, and their lenders are well aware of that trend. Cyclical borrowing isn’t an unfortunate side effect of these predatory loans; it’s a carefully crafted way to do business.
Payday loans are marketed as a quick fix to help bridge the gap between paychecks or, in some cases, alleviate financial emergencies. The television commercials are loud and the neon signs are bright: “The cash you need, right when you need it!” “$1,000 approved in two minutes. Deposited right into your bank account!”
In reality, these loans are debt traps. Payday loans usually amount to $300, feature a fee of $45, and carry an average interest rate around 400%. (Yup. 400%. With two zeros.) Repayment is due in full, with interest and fees, usually about two weeks after the loan is issued. The loan’s short-term due date generates the need for more loans (or roll over), forcing borrowers to take out another loan to cover their original debt or other expenses at the end of the month.
In practice, most borrowers can’t repay their loan in full when it is due. So when borrowers roll over their loans, they lose staggering amounts of money each time; hundreds and thousands of dollars over the course of the year. Let’s do some math. If the average payday loan of $300 with a $45 fee is rolled over 10 times, the borrower will owe $600 in fees alone.
The Consumer Financial Protection Bureau (CFPB) issued a report on payday lending in 2014, which revealed that four out of five payday loans are rolled over or renewed within 14 days. It’s no wonder that these loans are rarely repaid in cash and on time. The same report found that one out of five new payday loans cost the borrower more than the original amount. At their core, payday loans undermine consumers’ economic security.
So who’s paying the highest price for these dangerous credit products?
According to the Pew Charitable Trust’s 2012 study, most payday loan borrowers are women, white, and aged 25-44. Adjusted for other factors, Pew’s study found that there are five groups of people that have higher odds of using a payday loan: (1) people without a four-year college degree, (2) home renters, (3) African Americans, (4) people who make less than $40,000 a year, and (5) and people who are separated or divorced.
The dependency that payday lending creates is especially dangerous to survivors of domestic abuse. Ninety-nine percent of survivors already experience economic abuse, which can come in many forms. Abusers can make it impossible for survivors become or stay employed, keep survivors from reaching out to friends and family for financial support, and control their money or purposefully wreck their credit. Payday loans may be the only financial tool that survivors have access to, and they can become ensnared in another toxic relationship very quickly — this time with a lender. To make matters worse, survivors who suffer from economic abuse and are economically dependent on their abuser are much less likely to leave.
Fifteen states, including North Carolina and the District of Columbia, have outright bans on payday and car title lending. Nine states allow it in limited form. Whether it’s a combination of a 36% interest rate cap, loan duration limits, better consumer protection rules, or more stringent fee restrictions, we need to do everything we can to keep payday lenders out of North Carolina.
If we revisit the math from earlier, $600 in payday lending fees is a lot of money, especially for anyone who is at a higher risk of using a payday loan.
That money is not helping financially-strained households if it is going straight into a predatory lender’s pocket. Young military personnel with steady paychecks and limited financial education are prime targets for these kinds of lenders. Combat veterans, who return home to a higher risk of post-traumatic stress disorder and long-term unemployment, don’t deserve the added stress of trying to escape a meticulously designed debt trap.
The CFPB says that demand exists for “small dollar credit products”, and responsible lending practices can help consumers if they’re designed to be paid off in time. The states that have enacted a 36% cap have already seen a net total savings of $1.5 billion. Regardless of the device that protects consumers from these predatory practices, we must continue to demand better protection for ourselves, our families, and our neighbors.