Payday loans are scary.
And frankly they’re not just scary, they should also be illegal. Payday loans trap Americans, especially lower-income Americans, in a cycle of debt that could take years to get out of.
What happens when you have a family to feed? Or your air conditioner breaks? Your electricity is turned off? Your roof leaks? Your car breaks down?
Payday loans prey on these Americans and create what we call a debt trap.
Not surprising, the statistics around payday loans are also scary:
They come with interest rates of 300%-400% on average.
The average payday loan customer who borrows $400 for a loan to help them get by until their next paycheck winds up paying back $950 over 11 loan cycles in a year.
There are more payday lending stores than Starbucks and McDonald’s combined, and they target low-income neighborhoods and communities of color.
More than 75% of payday loan fees come from people stuck in more than 10 loans a year.
So, why do we still have payday lenders?
The Consumer Financial Protection Bureau gets a little closer every year to stopping the debt trap that payday lenders create, but it isn’t perfect.
The CFPB’s payday loan rule currently works to break the cycle of debt by requiring the payday lenders to:
Consider the borrower’s ability to repay the loan while meeting other expenses (however this only covers loans of 45 days or fewer);
Make up to six loans or 90 days of loans per year without considering ability to repay, but back-to-back loans must step down in size to wean people off; and
No longer debit a consumer’s account or re-submit checks after two consecutive bounces and must give written notice before making a debit attempt at an irregular interval or amount.
Sure, this will help diminish some harmful effects from payday lenders, but it’s a slow process. In some cases, this may reduce some of the 300%-400% interest rates, but there are ways for lenders to proceed as is – with their predatory practices.
Can we do anything about this?
Thankfully, states do have the ability to make their own rules and regulations. While the CFPB rules at the federal level, states can decide they want to implement their own rules, like capping interest rates.
Many states have now capped their interest rates at 36%. Why focus on interest rates? And why 36% you ask?
Interest rate caps are thought of as more than just numbers. They are reflections of our society’s collective judgment about moral and ethical behavior, as well as responsibility. Interest rate caps also tend to reflect an assessment about the upper limits of sustainable lending that does not undermine our economic stability.
Many states have chosen 36% because:
The 36% rate for small loans results in payments that consumers have a decent chance of being able to pay; and
A 36% rate gives lenders an incentive to offer longer term loans with a more affordable structure and to avoid making loans that borrowers cannot afford to repay.
What this means for us as consumers is that we can fight for capped interest rates and better rules around payday lenders when we vote.
Does a 36% interest rate feel more reasonable to you?
Check Propublica to see what your state has done.
Your employer can fight for you, too.
Does your organization offer employee loans in your benefits package?
If it doesn’t, it should.
Every year, payday and car title loans drain nearly $8 billion in fees from Americans.
How much more trustworthy would a lender feel to you if your employer trusts them as well? Probably a lot more than the average payday lender on your neighborhood corner street with the sketchy signs out front.
To learn more about TrueConnect’s No Credit Check Advance program (which really does not require a credit score but may help you build your credit) and the positive impacts it can have on you and your fellow employees, please contact Dexter@prosperwaco.org
If it’s interesting to you, send it to your HR/Benefits Director.
We anxiously await your call as we work to ensure the financial security of all Wacoans while giving them access to alternative credit products to meet life’s needs.
Dexter Hall is chief of staff for Prosper Waco and leads its financial security emphasis.