Everything You Wanted to Know About Payday Loans but Were Afraid to Ask
The current economic expansion in the United States has been one of the longest on record, having lasted for seven consecutive years. Even better, numbers that were released earlier this month by the Census Bureau indicated that Americans from middle-class families, as well as those with low incomes, had finally begun to profit.
Despite this, a significant portion of the American population lives paycheck to paycheck. In the event of an unexpected financial crisis, nearly half of all Americans, or 46%, admit they would be unable to come up with $400 on their own. Sadly, many people will resort to getting payday loans in order to make ends meet.
What exactly are cash advance loans?
There is a widespread misconception that borrowers of payday loans are unable to return the loan in full when it comes time for them to get their next salary. However, there is a caveat to this offer. Because the interest rates are so high—often 400% or higher, compared to approximately 16% on the average credit card—borrowers simply are unable to afford to repay the loan and yet cover their essential outlays at the same time. Instead, the vast majority of loans, almost 80 percent, are either refinanced or followed by another loan within a span of just two weeks. Borrowers wind up in debt as a direct consequence of this, with the typical borrower staying in debt for more than six months during any given year.
Why do borrowers utilise such services?
It is generally accepted information that payday loans are nothing more than a trap. Why therefore do borrowers even bother, especially at a rate of 12 million per year? To begin, the majority of people who take out payday loans—who are disproportionately people of color—have low or moderate incomes and have trouble obtaining credit from mainstream sources like credit card companies or banks, primarily because of their low credit scores. Payday loan borrowers are disproportionately people of color. As a direct consequence of this, payday loans frequently seem to be the most convenient solution.
It is a frequent misconception that people use payday loans as a stopgap measure for unanticipated financial setbacks; nevertheless, the majority of these borrowers use the money from their loans to fund their regular obligations. In recent years, the cost of fundamental necessities such as rent and child care has skyrocketed, while at the same time, wages have remained relatively unchanged. As a result, many Americans living on low incomes have been left without an adequate and reliable source of cash flow.
Just how terrible are they?
On a typical two-week payday loan of $350, the borrower will pay a total of $458 in fees when the loan is paid off. However, the majority of borrowers will end up paying an even higher price. Payday loans are often small amounts of money, but they may quickly snowball into thousands of dollars in debt, and the consequences of defaulting on these loans are serious. Payday lenders have the legal right to seize the bank accounts of borrowers who fail to repay their loans in a timely manner. This allows the lenders to ensure that their loans are paid before any other bills, regardless of how important or urgent those other bills may be.
When lenders attempt to withdraw an excessive amount of money from borrowers’ accounts, borrowers run the risk of being charged inadequate fund fees by their financial institutions. Even worse, an indebted borrower has a greater chance of having her bank account closed against her will. This forces many consumers further out of the financial mainstream and forces them to use alternative financial services that are more expensive and carry higher fees and risk, such as check cashers and pawn shops.
These issues have an effect on the entire family. Families living on a low income who have recourse to payday loans are also more likely to struggle to pay bills such as the mortgage, rent, and utility bills. This might result in the family losing their home through foreclosure or being forced to move, which is devastating on both the short and long term. Payday loans have also been linked to parents falling behind on their child support payments, which not only deprives families of much-needed income but also comes with severe repercussions for the parent who is unable to make the payments, such as having their driver’s license suspended or even going to jail.
To some extent, the entire country is responsible for footing the bill for this practise. More than four billion dollars worth of interest and fees are extracted from the economy by payday lenders each year, and that’s just the direct cost of the loans. It does not take into account the costs that are connected with homelessness (such as emergency shelter) for families that lose their homes, nor does it take into account the increased enrollment in public assistance programmes that is necessary to cope with the debt trap.
What measures can we take to safeguard borrowers?
Important are efforts being made on the state level to limit interest rates and fees to 36% or less, as have been done by 14 states and the District of Columbia. On the other hand, efforts to regulate lenders who engage in predatory lending have, for the most part, been shown to be fruitless exercises. For instance, in 2008, when voters in Ohio approved a prohibition on the practise, loan sharks continued to peddle payday loans under the appearance of being mortgage lenders after obtaining licences to do so as a result of the election. Similar practises were followed by predatory lenders in the state of Texas. Lenders have been successful in luring borrowers to take out payday loans in states that have outright prohibited the practise by using online channels that are able to operate nationwide. This game of “legislative Whack-a-Mole” being played at the state level has made it abundantly evident that the country requires federal reform in order to protect borrowers in an efficient manner.
Thankfully, in June, the Consumer Financial Protection Bureau (CFPB) proposed new rules that would put an end to some of the more egregious abuses that are now prevalent in the sector. Under the new regulations, loan sharks will be required to investigate potential borrowers in order to ascertain whether or not they are in a position to repay the loans they offer (in most cases). The rules will also prohibit the repeated loans that trap borrowers in debt: Lenders will not be permitted to directly roll over loans or loan to those who seek to re-borrow within 30 days, unless those borrowers can prove that they will be in a better financial position in the future. Repeated loans trap borrowers in debt by making it impossible for them to get out of their cycle of debt. Additionally, it will set significant restrictions on the authority of lenders to freeze the bank accounts of borrowers.
But here’s another suggestion: Do away with the requirement entirely. If borrowers utilise payday loans to solve chronic shortages, then economic insecurity must also be addressed, and this can be done by salary increases as well as changes to public assistance programmes. These can go a long way toward protecting against cash problems, which often force families to take out loans with such sneaky interest rates and fees.
No, Florida Isn’t a Model on Payday Lending
In any given year, 12 million people in the United States will apply for and receive a payday loan, which typically comes with an annual interest rate in the triple digits. As a result of the fact that four out of every five of these borrowers are unable to afford these exorbitant interest rates, millions of people wind up with debt that is unmanageable. However, just like a hydra that never stops reproducing, payday lenders frequently make a comeback whenever states make an effort to regulate them. Take the state of Ohio, for instance. Payday lenders have recently chartered themselves as mortgage lenders in accordance with state law, despite the fact that they do not make any home loans.
This comes after Ohio voters in 2008 approved a ban on payday lending by a majority of 64 percent and in 87 of the state’s 88 counties. And as a result of Arizona’s prohibition on payday loans, financial institutions shifted their focus to the provision of expensive auto title loans. One of the many reasons why the federal Consumer Financial Protection Bureau (CFPB) is working on a proposed rule to reduce abuses associated with payday loans is because of the difficulty that is encountered when attempting to regulate lenders at the state level.
Regrettably, some members of Florida’s congressional delegation are backing lenders in their pursuit of the lowest possible interest rates. The entire Florida congressional delegation, with the exception of Representative Thomas Rooney (R-FL), wrote a letter to the director of the Consumer Financial Protection Bureau (CFPB) last year arguing that new regulations are unnecessary because Florida’s regulations are “among the most progressive and effective in the nation.” Rep. Rooney was the only member of the Florida congressional delegation to sign the letter. Recently, they took it a step further by sponsoring the so-called Consumer Protection and Choice Act, which included seven Republicans and five Democrats from the state of Florida who are currently serving in Congress. The actions of the CFPB would be halted for a period of two years if this law passes. In addition to this, it would exclude states from the requirement that they adhere to the new CFPB rule provided those states modelled their own laws on the standards that Florida has in place. The bill also had the support of ten other representatives, including two Ohioans who, for some reason, were not aware of the outcome of the referendum held in their state in 2008.
This legislation might make sense if Florida were a model state for regulating predatory lending practises. However, Florida is not a model state. For instance, New York has a maximum interest rate of 25%, and state officials have been quite active in their pursuit of lenders who attempt to evade the law by providing illegal loans on the internet. In point of fact, 14 states and the District of Columbia have implemented comparable rate ceilings in order to safeguard borrowers against predatory lending practises. In accordance with the Military Lending Act, the annual percentage rate that can be charged on loans to servicemembers and the families of servicemembers is capped at 36 percent. However, the yearly interest rates in Florida average 360 percent, and it is projected that payday lending takes an additional $76 million out of the state’s economy each year. That hardly qualifies as “progressive and effective,” much less as a model for which we should strive to achieve national replication.
In point of fact, the limitations imposed by Florida that some members of Congress would like to see adopted by other states, such as a waiting time of twenty-four hours before applying for another loan, are mostly ineffective. More than eighty-five percent of borrowers in the state of Florida take out seven or more loans each year, and nearly two-thirds take out at least a dozen loans. This points to a product that makes an already difficult financial situation even more difficult. A borrower from Daytona Beach, Florida, shared their experience, saying, “I would take out a payday loan for emergencies and it would take me a whole year to pay it back.” I would have to juggle all of my other bills, which would cause me to have even more difficulties than I did in the beginning.
In spite of the fact that the proposed regulation from the CFPB has not yet been made public, there is no doubt that it will go further than states like Florida in preventing these kinds of debt traps. It should be required of lenders to determine whether the borrower is actually able to pay back the loan. This is a common-sense approach that can stop financial problems from snowballing further down the line. A lending practise that amounts to legalised pickpocketing should also be prohibited by the government. This practise involves making repeated automatic withdrawals from a borrower’s bank account as soon as funds are available, regardless of whether the borrower has more pressing bills to pay. These moves would make it more difficult to take advantage of borrowers who are vulnerable, and they would also complement the ability that states have to regulate interest rates.
The people of the United States want something to be done about the payday lenders who are draining money from the community and causing a great deal of financial strain. In point of fact, responsible credit has triumphed at every single election held on the topic, including those held in Ohio and Arizona in 2008 as well as in Montana in 2010. It is time for members of Congress to stop ignoring the will of the people and work toward making it more difficult for vulnerable individuals in their constituency to be taken advantage of.
Payday Loan Rules Would Help Low-Income Families Avoid $8 Billion in Fees
Elizabeth Warren, who was a professor at the time, reminded us in 2007 that “it is impossible to purchase a toaster that has a one-in-five probability of bursting into flames and burning down your house.” However, as she pointed out, it is entirely possible to purchase a financial product with the same odds of causing financial ruin. For example, payday and car title loans can come with annual interest rates of 300 percent or more, leaving many borrowers in a worse financial position than they were in the beginning.
New regulations were published today by the Consumer Financial Protection Bureau (CFPB), which will assist in removing these potentially hazardous financial items off store shelves. It is anticipated that the implementation of this law will assist low-income families in avoiding the annual payment of fees totaling $8 billion that are charged by predatory lenders. The Consumer Financial Protection Bureau (CFPB) will need not only public support for its rule to come into fruition, but also for Congress not to sabotage its efforts and for state legislatures to help push it to the finish line. The CFPB faces an uphill battle because it will need state legislatures to help push it over the finish line.
The payday loan industry and the title lending industry both make a profit off of families that are struggling to make ends meet, which is why these reforms are so desperately needed. These lenders typically offer quick cash, which can range anywhere from a few hundred dollars to a few thousand dollars, in exchange for access to a person’s bank account or a spare set of keys to their vehicle. They expect the money to be paid back either from the following paycheck or within the following month.
However, a significant number of borrowers do not have the financial means to repay the loan on their next salary or at the end of the month. Instead, four out of every five borrowers are forced to take out additional loans in order to pay off the first one they took out. As a consequence of this, interest and fees continue to accrue, and borrowers are unable to make progress in repaying the principal amount of the loan. This can result in a significant amount of economic hardship. After taking out a loan for $1,000, a woman living in St. Louis named Naya Burks discovered that her debt had ballooned to $40,000 due to interest, fees, and a legal dispute. In addition, the CFPB’s own research has found that one out of every five people who borrow money against their car’s title end up having their vehicle repossessed.
Therefore, it should come as no surprise that religious authorities from a wide variety of traditions have come out against these loans. Additionally, state governments have implemented corrective measures. These kinds of loans are prohibited in at least 14 states and the District of Columbia, all of which have enacted interest rate restrictions of no more than 36 percent. In point of fact, just 12% of previous borrowers in Arkansas reported that they were in a worse financial position as a direct result of the state constitution’s recent change to place a cap on interest rates.
Regrettably, a significant number of members of Congress appear to have missed the memo that these are poisonous items that do more harm than they solve. Even though lenders steal $76 million out of Florida’s economy each year, the state’s Congressional delegation, along with other groups, has attempted to obstruct the Consumer Financial Protection Bureau (CFPB), stating that the state already has the matter under control. In addition, only the year before, Congress explored making it more difficult for the Consumer Financial Protection Bureau (CFPB) to work independently and attempted to water down stringent regulations that prevent predatory lending and safeguard service members.
The rule that was issued by the CFPB will put an end to some of the most harmful practises that are prevalent in this business. Before extending credit to a borrower in the majority of cases, lenders will be required to determine whether or not the potential customer has the financial means to repay the money they borrow. It will place restrictions on the number and timing of loans that borrowers can take out. And it will restrict the ability of lenders to engage in practises similar to pickpocketing by repeatedly and illegally withdrawing money from borrowers’ bank accounts.
The fact that many states have been unable to solve this issue on their own demonstrates the significance of the strict federal regulations now in place. There are almost as many payday lending stores in Missouri as there are grocery stores, and the state’s average annual percentage rate (APR) for these loans is 444%. And in 2014, the Louisiana legislature was unable to enact even a feeble bill that would have restricted people to a maximum of ten payday loans per year. Not to mention the state of Ohio, where the majority of voters backed a ban on payday lending, but the lenders simply rechartered themselves as mortgage firms in order to avoid the law and continue operating.
However, states still have the ability to take action to put an end to this oppressive behaviour. They can follow the example set by New York, North Carolina, and other states by putting a cap on interest rates. This is an action that takes on added significance given that the Consumer Financial Protection Bureau is prevented from taking this action due to a loophole in the Dodd-Frank Act. And even those that already have robust rules on the books need to maintain their resolve in the face of pressure to lower their standards. It won’t take just one day to free yourself from the clutches of debt. But the Consumer Financial Protection Bureau has just taken a significant step in removing a dangerous product from the market. It is imperative that Congress and the rest of the country take note.
Talking Finance and Faith: Payday Loans and Franciscan Pawnshops
We occasionally hear from people who are deeply committed to either religion or capitalism that they believe the two should remain in their respective spheres of influence. In the tradition of my Catholic faith, there is a long history of religious people taking positions on what makes financial transactions useful and just, and intervening to make reality closer to the ideal. One such religious person was St. Thomas Aquinas, who in the fifth century A.D. established the first bank.
The practise of charging any interest on loans was condemned as “usury” by the Catholic Church for a significant portion of the first two millennia of Christianity. St. Augustine, writing in the late ancient period, described loans as one form of charity. He assumed that the lender would provide a service to the needy borrower at some cost to themselves, and therefore would not charge interest on the loan. He came to the conclusion that the majority of those who require loans in order to make ends meet are low-income individuals, whose requirements ought to be at the forefront of Christian concern. The same realisation led some Italian Franciscans to begin opening pawnshops in the 15th century.
These pawnshops were known as montes pietatis, and they were operated as charitable organisations to assist less fortunate people in gaining access to smaller loans. The official teaching of the Church was revised when it became apparent that certain local practises were assisting those who were in need. In the year 1515, Pope Leo X made the proclamation that it was permissible under church law to charge “moderate” amounts of interest in order to ensure the continued operation of loan organisations. (Despite the fact that it is acknowledged that lending at interest could be done in a moral way, there is still a deep-rooted stigma against Jewish moneylenders in European and American culture even to this day. Jewish moneylenders had historically responded to the needs of Christians for loans.)
If you hear a Christian today condemning something as “usury,” like the theologian Alex Mikulich does in this clip, it’s likely that they are not condemning the practise of charging interest in general but rather implying that a specific kind of loan is exploitative, unfair, and harmful to the borrower. In places like Illinois, Kentucky, and Minnesota, Catholic organisations are using this tradition as a useful weapon in their fight against some of the more exploitative business practises of payday lenders.
The conversation regarding the payday lending industry is continued in the recently released film Spent: Looking for Change. This captivating movie makes two things abundantly obvious. To begin, many of the methods that are now used in the payday loan sector are actually exploitative and damaging to families that are already on the brink of financial collapse. In the movie, there is a family that takes out a loan for $450 and calculates that by the time they have paid off the debt, they would have paid more than $1700 in interest.
Another borrower was denied the ability to repay her loan until she was in a position to make full payment; as a result, she accrued additional interest despite the fact that she was able to make payments on her loan and ultimately was forced to give up the vehicle that she required for her employment.
Second, despite the fact that payday lenders and check cashing services charge fees that are so high they could be considered usurious, these businesses satisfy a demand that would otherwise go unfulfilled. There are as many as 70 million people in the United States who are unable to use traditional banking services due to factors such as having poor credit, having no credit (possibly as a result of making the cautious decision to avoid using credit cards), or not having access to traditional banks in their geographic area.
American Express, which is announcing new financial products designed to help those who are underserved by the traditional financial system and who turn to usurious lenders like the people depicted in the film Spent, is the film’s sponsor. American Express is also making the announcement. This seems to be consistent with a trend that was noticed in the New York Times earlier this year: in reaction to rising inequality inside the United States, businesses are altering their offers to cater to either highly wealthy consumers or consumers who are becoming increasingly impoverished. For those who have traditionally been in need of financial services, the possibility that those services would become more reasonably priced as a result of this trend is, I think, cause for cautious optimism. But we shouldn’t lose sight of the fact that a high degree of inequality is accompanied by a number of other problems in society.
Let’s not make the assumption that those working to alleviate poverty can just kick back and take it easy now that the market is starting to respond to the demand in this area. The developers of Spent have started a petition in an effort to make prize-linked savings accounts legal. Another potentially fruitful reaction would be to back Elizabeth Warren’s initiative to make it possible for post offices to provide low-cost financial services. Watching the documentary Spent and talking about it with others is a fantastic way to keep the conversation going.
In addition, I would like to encourage people of faith and anyone else who is concerned about poverty to not stop there. Microcredit organisations like as Grameen America and Kiva Zip provide assistance to private individuals and groups, such as perhaps you or your congregation, in the process of making interest-free loans to proprietors of small businesses in the United States and other countries. They are supported by charitable contributions, boast impressive payback rates, and assist those in need in avoiding the most exploitative elements of the financial system.