- Payday lenders specifically target Black and Latinx groups, with more locations in minority areas.
- On the other hand, this $100 Loans Online suggests this choice for individuals living paycheck to paycheck.
- Paydaychampion that provide small-dollar loans and early access to paychecks might be a viable alternative for consumers in need of cash in the near term.
- This article is part of a series called “The Cost of Inequity,” which looks at the challenges that disadvantaged and disenfranchised people confront in various fields.
Payday loans have a bad reputation for being a financial instrument that preys on the poor. However, they are still a lifeline in between paychecks for many people.
Even though the overall number of payday loan stores has decreased over the last decade, it remains a significant sector. According to Pew Charitable Trusts, almost 12 million Americans take out payday loans each year.
Payday lenders’ days may be limited due to heightened regulatory scrutiny and competition from new tech-focused rivals.
Federal regulators, such as the Consumer Financial Protection Bureau (CFPB), are refocusing their attention on payday lenders under the new administration and might reintroduce harsher underwriting requirements that the previous administration canceled.
Payday loans trap people in debt.
According to the Consumer Financial Protection Bureau, consumers generally borrow $375 from payday lenders, with costs averaging roughly $55. A $55 fee on a $375 two-week loan works out to around 15% APR, which is a good deal compared to credit cards.
When the terms are annualized, they equate to a 382 percent APR. Borrowers often fail to repay payday loans within two weeks, resulting in a debt cycle.
“We know that payday loans are often short-term loans meant to trap borrowers in a long-term debt cycle,” said Charla Rios, a researcher with the Center for Responsible Lending (CRL).
According to the CRL, fees collected by borrowers who take out loans more than ten times a year account for almost 75% of payday lenders’ earnings. Fees cost customers $4 billion per year in the 34 states that allow triple-digit interest rates (other jurisdictions have imposed rate restrictions).
Payday lenders are not obligated to evaluate a customer’s capacity to pay back the loan. They typically need access to users’ bank accounts to deposit the loan and then debit it when it’s time to pay it back.
If the borrower’s checking account is insufficiently funded, various overdraft penalties may be incurred. Unpaid debts may potentially be sold to debt collectors by payday lenders.
Payday lenders are primarily found in minority communities.
Much of the criticism directed towards payday lenders arises because they are often found in areas with larger populations of people of color.
“There’s been a lot of research done both by the Center for Responsible Lending and a lot of other consumer advocates throughout the United States that shows that payday lenders have often situated their storefronts in neighborhoods of color,” Rios said. California, Colorado, Michigan, and Florida were among the CRL that conducted the studies.
According to a 2016 survey, neighborhoods with payday lending establishments within 2.5 miles had twice as many Black inhabitants as the rest of the state.
Even after adjusting for income, the CRL discovered that high-income, high-minority regions in Florida had more payday loan establishments, according to Rios.
Regulators have gone back and forth on whether or not to regulate the payday lending business.
Regulators have scrutinized payday lenders in recent years.
The Consumer Financial Protection Bureau (CFPB) published a regulation in 2017 that required payday lenders to examine borrowers’ capacity to repay the loan, warn them before debiting their bank accounts, and restrict the number of times a lender might try to debit a borrower’s bank account.
The regulation was supposed to go into effect in August 2019. However, it was postponed until November 2020. The Consumer Financial Protection Bureau also repealed the underwriting criteria requiring payday lenders to analyze a customer’s repayment capacity.
However, recent pronouncements by the Consumer Financial Protection Bureau (CFPB) suggest that the agency refocuses on payday lending under the incoming administration.
“The great bulk of this industry’s earnings came from customers who couldn’t afford to repay their loans, with most short-term loans in reborrowing chains of 10 or more,” interim director Dave Uejio stated in a statement in March.
Mejia pointed out that the previous administration had canceled the underwriting standards to address these consumer damages but hinted at future rulemaking.
“The bureau thinks the problems highlighted in the 2017 rule still exist and will employ the authorities granted by Congress to remedy these harms, including via aggressive market monitoring, supervision, enforcement, and, if necessary, regulation,” Mejia said.
Small-dollar loans and access to earned wages are two options.
There are alternatives to payday loans for many people, particularly the unbanked and those with no or bad credit.
Paydaychampion is a small-dollar lender. It caters to those with no or bad credit, and it provides loans ranging from $500 to $4,000 with interest rates ranging from 59 percent to 160 percent and durations as long as 18 months.
That’s pricey terms. Paydaychampion ‘s users are supposed to check on a consumer’s behalf to determine whether they qualify for a near-prime loan with conventional lenders.
Paydaychampion ‘s loans are designed to help users develop credit. There are no fees, and Paydaychampion does not sell its loans to debt collectors, so every payment goes toward the principal amount of the loan.
In recent years, earned wage access has developed as a viable alternative to payday lending, allowing customers to access monies they’ve already made between paychecks.
Many companies that provide access to earned wages, such as DailyPay and PayActiv, work with businesses to reach customers. Fees are often attached with the product, but since these players are integrated into payroll systems, they don’t debit bank accounts that may be insufficiently funded.
According to a poll conducted by DailyPay, 70% of customers no longer need payday loans, and 78 percent believe that relying on earned salaries helps them avoid late penalties. ADP, the payroll behemoth, is also developing made wage access solutions.
There are certain disadvantages. Privacy risks exist for both third-party applications and integrated payroll providers. Employees may be hesitant to utilize these items if they believe their bosses would monitor their use.
