dangers of payday finance lending

The Dangers of PayDay Lending

05 / 05 / 2019

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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  1. These companies are horrible. They prey on people who already do not have the money and charge them exorbitant amounts of interest towards these loans. I do beleive there were some laws that put a cap on the amount that people could charge, but still to go get a loan for a little bit of money and end up paying almost doubled is horrible. My nephew did it once for $300 dollars to get his car fixed. In the end her owed them close to $600. It was crazy but he vowed never to go back. I can’t understand why folks use these companies, but I guess if you are in need of the money right now, you’ll do almost anything to get it.

  2. This is a good look. My parents didn’t teach much in terms of credit responsibility and such. I had to do alot of homework by myself…and thankfully I didn’t do anything to jeopardize my credit score. I always wondered how this pay day lending thing works. Now I now. Kudos.

  3. I’ve always had a hard time understanding the logic behind pay-day loans. Like you noted in your post, the consumers always end up in the cycle of retunring to these places, only to end up having to evade the lenders. It’s a sad reality, and businesses like these thrive in low-income areas.

  4. OMG! Thank you so much for this article! You talkin about debt? My moms STAYED at the pay-day loan place…like WEEKLY! I think that over time she began to realize how much she was getting played but by then, she was already too deep in. I knew nothing about financial stability coming into my first year of adulthood (which occured 9 months ago lol) except “Im never gonna be poor again”. That is not enough if you dont know how to prevent poverty. So glad you wrote this article. It makes it plain and clear! We need more of this in our communities. The question is: how do you get folks in a community where money is strapped to come to a seminar about financial responsibility? What suggestions could be offered when they ask ‘what are they supposed to do when money is tight’? How many of us with financial smarts are going and offering free seminars to low income neighborhoods?

  5. In our attempts to address the systemic discrimination purveyed by the Payday lending institutions we must not lose site of the true culprit in this perpetration of fraud. Often the actual lenders (the “mom & pop” locations) bear the brunt of the public backlash when in all actuality the major commercial banks are truly at the helm. There have been many documentaries which serve to dissect the particular involvement of banks such as Wells Fargo and others of similar stature; these mainline institutions conveniently veil themselves and their predatory products with the familiarity of staple institutions within minority communities (the check cashing facilities, the Laundromats, even mini marts). Don’t be bamboozled by the barrage of largely vacuous legislative actions brought against these lenders in an attempt to root out the worst among their unscrupulous practices but rather pay keen attention to what happened in the aftermath of said legislation’s enactment. In many states, these legislative reforms have indeed driven some Payday lenders under, but more often the vehicle(s) through which these predatory financial instruments are delivered have simply changed. Upon a recent visit to a US Bank ATM in the Cincinnati area, after conducting my transaction I was extended the “courtesy” of obtaining a Payday loan directly from US Bank if I so chose. Now think to yourself for just a minute, is it more exploitative to offer these loans at standalone establishment where individuals would have to seek them out of their own accord or is the practice of predatory lending even more egregious when a reputable bank not only makes the solicitation but does so in the course of a routine financial transaction at an ATM? Maybe it’s just me but that seems a bit tantamount to entrapment; sort of like selling illicit drugs at the rehab clinic. Herein lies a testament to the power of special interest lobbies; the banking lobby spent a record amount of money in Ohio over the course of the last election cycle in fervent opposition to the proliferation of Payday lenders only to turn around and offer these products themselves, with added convenience and without solicitation but with nearly mirrored, exorbitant interest rates. The predatory practice hasn’t changed, the legislation simply artificially created a market more favorable to expansion of commercial banking products at the expense of the most vulnerable populations among us.

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