dangers of payday | finance | lending

The Dangers of PayDay Lending

When I was a kid I vividly remember being warned of the various dangers the outside world posed to a young child. I was told never to talk to strangers because there was a possibility I could get kidnapped. I was also told to look both ways before I crossed the street. The point being, there was always someone older, more experienced that was looking out for my best interest.

Now that I’m an adult, I no longer am under the direct influence of parents. As a result, I am subjected to the media, the entertainment industry, and the internet to tell me how I should live, what dangers I should lookout for, and what clothes I should wear. These outlets are not only influential in my life but in the everyday lives our our entire society.

Here is a perfect example, the other day I was rolling in the car listening to one of the popular nationally syndicated black early morning talk shows on the radio. During one of the commercial episodes the hosts acted out a commercial for an online pay day lender who could approve you for a short-term loan in a matter of seconds, all you needed was a bank account and proof of employment. As I thought deeper about what I was hearing, I found myself getting upset. My rationale was as follows, black radio with a large minority audience, advocates the use of payday loans when you are in need of extra cash… I want that to set in for a second before I dive into the reality of payday lending.

In 2019, payday lending was a $42 billion industry. In case you don’t know, payday lenders make all of their money charging customers fees for short-term loans and check cashing. In addition, they are mostly concentrated in low-income neighborhoods where residents are barely making ends meet and credit cards are hard to come by and maintain.

So let me paint the picture, you are short on the rent and have no where else to turn. So, you walk into a payday lender seeking a short-term cash loan. They give you a loan in exchange for a personal check to cover the loan plus the fees. They are automatically going to cash the personal check on your next payday. According to the Huffington Post Investigative Fund, if you took out a $200 loan, you would have to pay back $247.80 on the due date. That’s an annual interest rate of 623%!

What makes payday lending so vicious, besides the high interest rates, is the cycle customers get caught in once they take out their first cash loan. Typically, cash strapped customers pay off their original loan just to take out another loan to cover their other bills. That’s why 99% of customers become repeat business. Eventually, customers get so behind on bills, they start defaulting on their payday loans.

You would think there would be better protection for the consumer but these payday lenders lobby in Congress just like other special interest groups. In fact, they spent $6.1 million in 2019 lobbying, which was twice the amount they spent in 2018. Since the federal government can’t seem to pass federal legislation, states have taken the initiative to protect consumers with reasonable small loan cap rates to as low as 36% annual. Only 15 states and the District of Columbia have passed such legislation. Payday lenders typically charge 390-780% APR.

With such limited protection, consumers repeatedly fail to repay these high interest loans which often leads to bounced checks, harassing phone calls from lenders, threats, and various acts of intimidation. Research indicates that payday loan users are almost twice as likely to file for bankruptcy as borrowers who are turned down for a payday loan (often turned down for lack of a bank account).

Now, imagine if black radio advocated and advertised for savings accounts through credit unions and high interest yielding savings accounts. Buyer beware.…

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