Action Alert

Payday Lending

Payday Lending

How quickly the holiday season was here! Many families celebrated the season by trying to live up to the adage, “eat, drink, and be merry,” while others continued to struggle to fulfill basic needs. Millions of people in this country experience crippling debt, but not the predictable credit card debt. Instead, they amass debt not discussed commonly: payday loans. Over 12 million people borrow payday loans, often without realizing that these loans carry triple-digit interest rates.

A payday loan is a “quick fix” short-term consumer loan where a lender will charge a high interest rate based on credit profiles. Also called check advance loans or cash advance loans, these loans are for immediate credit. Payday loan providers are usually small credit merchants with physical locations that permit on-site credit applications and approval, with some allowing online options. These small-dollar, high-cost loans are usually for amounts between $50 to $1,000.

The use of payday loans increased rapidly between 2008 and 2013, when traditional banks shut down 20,000 branches. Over 90 percent of them were in low-income neighborhoods where the average household income is well below the national median. Payday lenders rushed in to fill the banks’ space, which led to payday lendings’ growth to a $40 billion industry. These loans are usually to pay for essentials such as mortgage, food, utilities and medical bills, and not leisure items as many believe. With this knowledge, lenders strategically place their facilities near hospitals, urgent care centers and funeral homes in communities of color.

A payday loan’s principal is typically a portion of a borrower’s next paycheck. The lender usually bases their loan principal on the borrower’s short-term income, so pay stubs from their employer must be provided. Wages are also used as collateral. Lenders are allowed wage garnishment if the loan is not paid off by a certain time, putting many families in jeopardy.

Payday loans are usually due in two weeks and are tied to the borrower’s pay cycle. Payday lenders have direct access to a borrower’s checking account on payday, electronically or with a postdated check. This ensures that the payday lender can collect from the borrower’s income before other lenders or bills are paid. The average payday loan requires a lump-sum repayment of $430 on the next payday, consuming 36 percent of an average borrower’s gross paycheck. However, research shows that most borrowers can afford to pay no more than 5 percent and still cover basic expenses.

12 Million Americans

Approximately 12 million Americans use payday loans each year. The average payday borrower takes out 10 loans per year and spends 199 out of 365 days in debt (not counting the extra day in a leap year). African-Americans are twice as likely to take out a payday loan than people of other races/ethnicities. People in households making between $15,000 and $25,000/year are more likely to take out a payday loan than others. Disabled and unemployed people are also more likely to take out a payday loan along with those who haven’t completed a four-year college education. Several studies find that women, many of whom tend to be single mothers, comprise the majority of payday loan borrowers. The business model is predicated on borrowers’ inability to repay the loan; most of the fees that support lenders come from borrowers who take out 10 loans a year.

In California, a payday lender can charge a 14-day annual percentage yield (APR) of 459 percent for a $100 loan, with finance charges ranging up to $18 per $100 loan. Although most states have laws that limit interest charges to less than 35 percent, payday loans are able to take advantage of the many loopholes in state lending laws, allowing lenders to charge high interest rates. Lenders rely on borrowers not being able to pay back their loans. Many borrowers cannot pay the loan without reborrowing, piling on more fees and interest, and ultimately more debt. Over 80 percent of payday loans are rolled over or reborrowed. This allows lenders to make 75 percent of their money from reborrowing while the consequences for borrowers are bankruptcy, delinquency on other bills, and bank account closures.

Although the Truth in Lending Act requires payday lenders to disclose their finance rates, most borrowers ignore the costs in an effort to make ends meet. This has called for many court cases to be filed against payday lenders. There is a need to create a fair lending market for consumers. Individual states govern the regulations of these laws and 15 states have already completely abolished payday lending due to its predatory nature.

Colorado Reform Bill

In 2010, Colorado passed a payday law reform bill that lowered payday loan interest rates by two-thirds and removed the traditional two-week installment plan replacing it with six-month installment plans. Although half of the payday loan stores in Colorado have shut down, the other half serve twice as many borrowers at every location, and 91 percent of residents are no further than 20 miles from a store that gives them the same access to credit. Average payday loan borrowers in Colorado now pay 4 percent of their next paycheck toward the loan instead of 38 percent. Borrowers save money by repaying the loans early, and 75 percent do so. Borrowers save more than $40 million annually on the loans. Colorado has served as a case study for people who are pressuring state legislatures to fix this issue.

Payday loans enable a cycle of debt due to high rates of interest and high repayment installments. In most cases, the borrower will be unable to repay the debt by the due date. Then another loan is acquired to cover the difference, putting them in a deeper financial crisis than they were already in.

Scripture admonishes us, “Do not rob the poor because he is poor…” (Proverbs 22:22). People of faith have reason for concern, but this same faith can move us to action. People of conscience and faith around the country brought their concerns to the ballot box. South Dakota passed a ballot initiative that capped payday loans at 36 percent in the 2016 election. In Colorado, despite the payday law reform bill that was passed in 2010, payday lenders continue to ensnare customers in a cycle of high-cost debt. Following the example of South Dakota, during this year’s midterm election Colorado passed the same measure on its ballot initiative by over 78 percent. Rather than wait for Congress to make federal changes, individual states are taking “We the People…” to heart and becoming the change that they want to see. You can do the same.


Rev. Ebony J. Grisom is the director of the Ecumenical Poverty Initiative.

Posted or updated: 1/2/2019 12:00:00 AM
 
Give Thanks. Give Now.
 

Take Action:

Contact your local congressional representative at Capital Switchboard (202-224-3121) or in their district office to voice your support for:
  • S.1659 & H.R.3760 - Protecting Consumers from Unreasonable Credit Rates Act of 2017
    These bills were drafted to amend the Truth in Lending Act to prohibit a creditor from extending credit to a consumer under an open-end consumer credit plan (credit card) for which the fee and interest rate exceeds 36%. The bills also set forth criminal penalties for violations and empower state Attorneys General to enforce the bills.
  • H.R.6972 - Consumers First Act
  • H.R.3606 - Overdraft Protection Act of 2017
    This bill was drafted to amend the Truth in Lending Act to establish fair and transparent practices related to the marketing and provision of overdraft coverage programs at depository institutions, and for other purposes.

Act:

  • Contact your Senators and Representatives to express your support for a state and/or federal 36% rate cap on payday loans. 
  • While speaking to your Senator or Representative’s office, express your support for the Consumer Financial Protection Bureau. Urge them to do everything that they can to protect the agency that is tasked with protecting consumers from predatory loans. 
  • Pay closer attention in your worship communities for people who seem especially stressed and financially stretched this holiday season. Remember that the holiday season exacerbates the consistent struggle to make financially strained ends meet. 
  • Partner with The Ecumenical Poverty Initiative to visit your congregation, college campuses, or other communities to offer workshops and other opportunities to (further) empower your community to join the fight against predatory lending. Please contact them at info@faithendpoverty.org.

Learn more:

Read more:

Resources:

  • Read ¶ 163 page 415 The Economic Community, and ¶ 4053 Section V. page 437 of The Book of Resolutions of the United Methodist Church.
 

 

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