Young People Are Payday Lenders’ Newest Prey
Payday lenders have historically preyed on disadvantaged groups; but, in recent years, they have shifted their attention to young people as a new target demographic. In the meantime, the government of Donald Trump has enabled the culture of bribery and corruption that exists in Washington to continue supporting this exploitative enterprise. People have been encouraged to use payday loans for a very long time on the grounds that they are a fast and simple technique to obtain cash in between paychecks. There are around 23,000 payday lenders operating in the United States today, which is approximately double the number of McDonald’s restaurants in operation in the country.
Although payday lenders target a wide variety of Americans, the most common victims are members of socially or economically disadvantaged groups. People who do not have a college degree, persons who rent their homes, people of African descent, people who make less than $40,000 annually, and people who have been divorced or separated are the most likely to have taken out a payday loan. Additionally, a growing number of borrowers for payday loans are those under the age of 30.
The bulk of people who take out payday loans are between the ages of 18 and 24, despite the fact that just approximately 6 percent of adult Americans have utilised payday lending in the prior five years. Because the cost of living is increasing at a rate that is higher than inflation, quick loans that do not require a credit score can be an appealing instrument for filling personal financial gaps, particularly for younger people. A survey conducted by CNBC in 2018 found that close to 40 percent of those aged 18 to 21 and 51 percent of Millennials have contemplated applying for a payday loan.
Payday loans are a terrible deal
People who are most susceptible to payday lenders are frequently underbanked or do not have accounts at major financial institutions. As a result, these individuals are forced to rely on services such as payday lending in order to establish or establish themselves as having credit. The predatory nature of payday lending is highlighted by the industry’s exorbitant interest rates, which typically range from at least 300 to more than 400 percent annually on average.
This only makes matters worse. When interest rates are high, it becomes difficult for borrowers to repay their loans and keep up with their other financial obligations. Consequently, borrowers get themselves into a debt trap, which is a business model for payday lending that relies on targeting populations that are disproportionately low income or ethnic. According to research conducted by the Consumer Financial Protection Bureau (CFPB), the majority of payday loans are given to borrowers who have a history of taking out 10 or more loans annually.
The majority of the time, consumers turn to payday loans because they are struggling to keep up with their ongoing spending, not sudden or unexpected needs. For members of the generations known as Millennials, who were born between 1981 and 1996, and Generation Z, who were born in 1997 or later, these reoccurring costs include payments on school loans and the price of transportation on a daily basis. A study that was conducted by the Pew Charitable Trusts in 2012 found that the overwhelming majority of people who took out payday loans (69 percent) did so in order to cover a reoccurring expense.
Only 16 percent of people who took out payday loans did so in order to cover an unexpected expense. Even though studies show that payday loans were neither designed for nor are effective at helping to pay for recurring expenses, the average borrower is in debt from their payday loans for five months per year as a result of using eight loans that each last for 18 days. This is due to the fact that the average loan term for payday loans is 18 days. In the end, the fees associated with payday loans cost 12 million borrowers in the United States a total of $7 billion each and every year. This figure accounts for more than half of the total cost of payday lending in the country.
This blatantly predatory sector is the sole reason why it is able to persist because it continues to game Washington’s culture of corruption, which permits special interests to prosper at the expense of average Americans. Now that the restrictions governing the payday lending sector have been loosened by the Trump administration, payday lenders have the go-ahead to exploit customers and have set their sights on a new target demographic: young people who are already in debt.
Already confronting a historic debt issue are today’s young people.
Young people in today’s society are more likely than those of any previous generation to struggle financially. The current state of the nation’s student loan market is a major factor that contributes to the financial challenges faced by young people. Between the years 1998 and 2016, the number of households carrying a balance on their student loans more than doubled. Student loans are the most common type of consumer debt held by members of Generation Z, with an estimated one-third of all adults between the ages of 25 and 34 having at least one outstanding balance.
Even while many members of Generation Z are not yet old enough to enroll in college and accrue debt from student loans, they nonetheless face financial hardship in order to afford essential expenses like food and transportation to work, and they worry about the costs of higher education in the future. According to a survey that was conducted not long ago by Northwestern Mutual, members of Generation Z have an average debt load of $14,700, while members of the Millennial generation possess an average debt load of $27,900. Millennials earn 43 percent less than what Gen Xers, who were born between 1965 and 1980, made in 1995. Young workers today make the same amount of money as workers without a college degree did in 1989, even if they have debt and a college degree. In 1989, workers without a college degree made more.
Young people in the United States who graduate from college with student loans are the first generation in history to have negative net wealth. The net worth that is held by Millennials is only half of what it was held by Baby Boomers at the same age. These findings are considerably more alarming when looking at young African Americans. Millennials: Homeownership, median net wealth, and the percentage of people in this generation who are saving for retirement all saw declines between 2013 and 2016 respectively.
These facts, in addition to the fact that 61 percent of Millennials are unable to pay their costs for three months, in comparison to 52 percent of the general public, demonstrate how pervasive financial instability is for young people. This figure rises for people of color, with 65 percent of Latinx young adults and 73 percent of African American young adults unable to meet their costs of living for a period of three months. This is especially problematic when considering that the Millennial generation and Generation Z are the most diverse generations in the history of the United States, with the majority of both groups consisting of young people of color.
The administration of Donald Trump has removed all restrictions on payday lenders.
Even though a growing number of young people are falling prey to payday lenders, the Trump administration is making it easier for this exploitative sector to continue to function. A rule that shields consumers from loans with interest rates of 400 percent or more was recommended for repeal by the Consumer Financial Protection Bureau (CFPB) of the Trump administration in February of 2019. Payday lenders were required to determine whether a borrower could repay the loan while still affording basic expenses in accordance with the rules that were imposed in 2017.
The rules were conceived during the Obama administration and put into effect in 2017. However, the acts of the Trump administration have rendered those safeguards useless. In 2018, acting CFPB Director Mick Mulvaney took the side of the payday industry groups that were suing the agency to stop these rules by requesting that implementation be delayed until the lawsuit’s decision was made. These groups had sued the agency in an effort to stop these rules.
The payday lending industry celebrated the potential end of rules that were meant to protect its customers by holding its annual convention at President Donald Trump’s National Doral hotel for the first time in June of 2019. The purpose of the rules was to protect the industry’s customers. It is expected that a decision regarding the rules will be made in the spring of 2020. If the decision is made in favour of the payday loan sector, it will be one of the most blatant examples of pay to play during the time that the Trump administration has been in office.
Young people are the primary target market for payday lenders
It should come as no surprise that financial institutions are capitalizing on the high rate of technology use among young people in order to boost the possibility that these individuals will utilize their services. The youngest age group is the one most likely to utilize mobile applications to manage their finances: According to findings from a poll conducted in 2017, respondents aged 18 to 24 had a mobile banking app usage rate of 48 percent, while respondents aged 25 to 34 had a usage rate of 35 percent or higher. It is not surprising that a new app-based short-term lending service called Earnin has concentrated its marketing on this target-rich market given the large number of young people who are turning to popular applications and streaming sites such as Snapchat and Hulu.
Earnin is a mobile application that allows users to access money that they have earned prior to their payday. Users have the option to “tip” on the app, which is a euphemism for paying what is essentially an interest fee, but doing so is not required. Earnin is a smartphone app. Earnin is also referred to as an early wage access provider on occasion. This is because the company makes it possible for users to access their earned wages in the interim between biweekly paychecks while ostensibly avoiding the typical lending regulations. The Truth in Lending Act, which mandates that financial institutions disclose the interest rates they charge, is one of the regulations that are included in these regulations.
Earnin attracts young people with commercials that promise, “Get paid the second you leave work.” (Get paid the instant you leave work) Earnin does not collect mandatory interest rates like a traditional payday lender, but it does rely on the aforementioned tips, which has resulted in the company receiving pressure from regulators who are concerned that Earnin has operated as an illegal payday lender. Although Earnin does not collect mandatory interest rates like a traditional payday lender, it does rely on the aforementioned tips.
There does not appear to be a significant difference between the interest rates on a regular payday loan and the tips, which apparently can reach as high as $14 on a loan of $100. In point of fact, the app has disabled a feature that had been made available in New York for a brief period of time. New York is one of 16 states and the District of Columbia that prohibits payday lenders. This feature allowed the app to issue up to 10 times more in loans to users who voluntarily tipped than it did to users who did not tip.
Banking law specialists are in agreement that Earnin is a lender that is trying to pretend that it is not. These specialists have described the product that the company is selling as “a loan but we don’t want to be regulated as a loan.” Earnin has also been accused of skirting lender regulations, and the company has stated that it is exempt from a 2017 federal rule on payday lending as well as the Truth in Lending Act. This is in addition to the fact that Earnin has been accused of skirting lender regulations.
The New York Department of Financial Services is conducting an investigation into Earnin as part of a larger investigation that is being supported by ten other state banking authorities including Puerto Rico. Additionally, a class action lawsuit against Earnin is currently pending in the state of California. The lawsuit accuses the company of breaking federal lending laws by operating as an unlicensed lender.
The complaint is now being heard at the United States District Court for the Northern District of California as of the month of December 2019. Earnin’s website makes the assertion that the app is not a payday lending service, despite the fact that the company has not made any public statements regarding the ongoing dispute. Additionally, Earnin has claimed that they “anticipate and encourage conversations with authorities about our business and how the community functions” in an interview with “NBC News.”
Conclusion
When compared to previous generations, young people in today’s society face significantly greater financial challenges. Difficulties in paying for essential expenses and the burden of student loans are among the primary factors contributing to this strain. Payday loans can be enticing because they appear to be a simple and straightforward option to bridge the financial gap between paychecks. The majority of payday loans, on the other hand, are granted to borrowers who take out multiple payday loans within the same year. This makes payday loans the antithesis of a quick solution to a problem.
In the meantime, the government of Donald Trump has provided a green light for an exploitative industry to go for the most defenceless members of society. It was just recently reported that some of the most influential leaders in the payday loan sector claimed that giving to President Trump is the best method to obtain influence and avoid restrictions. This culture of paying to play is allowed to persist in Washington because there are not enough robust protections against ethical infractions.
Reforms, such as prohibiting lobbyists from fundraising for politicians and strengthening lobbying rules, would assist in protecting American citizens from becoming victims of the culture of corruption in Washington. In order to rein in and make changes to the system, the public requires reforms that are both substantive and structural. The most effective strategy for ensuring that young people and other vulnerable populations are not damaged by predatory lending practises is to lessen the influence that payday lenders have over lawmakers and the policymaking process.