Predatory Lending: Where Employees Turn When They Have High Debt and No Savings
Every year, roughly 12 million Americans take payday loans out, which is the worst predatory lending practice. This type of loan is typically for a small amount, but a borrower needs to write a post-dated check for the full amount including any interest or fees. Should the loan not be repaid on time, the predatory lender will still cash the check.
Combining this with exorbitant fees and high-interest rates, along with little consideration for whether or not a borrower can repay the loan, payday loans become a cycle of debt that is hard to escape.
The Director of the FTC’s Bureau of Consumer Protection, Andrew Smith, has gone on the record to state, “Online payday lending companies bleed consumers dry, by promising a single-payment payday loan, by then automatically debiting consumers’ bank accounts for finance charges every two weeks, in perpetuity.” Despite this, when money is tight, payday loans are unfortunately an attractive offer for employees.
The Ins and Outs of Predatory Lending
What makes predatory lending so dangerous is the fact that payday loans are easy to get, but hard to pay off. There are 32 states that allow payday lending, and borrowers in these states can simply take out a payday loan by walking into a lender and providing a valid ID, proof of income, and a bank account.
Contrary to a mortgage or auto loan, there is no physical collateral needed which makes these very easy to acquire. Nationally, the average APR on a payday loan is about 400% because a credit score is not required. The means to access this predatory loan is low… A personal loan APR generally ranges from 10% to 28% depending on your credit.
That’s a huge difference!
Why is Predatory Lending a Problem?
According to the CFPB’s own research, over 80% of people who take out a payday loan aren’t able to pay it back within two weeks, which leads to them taking out another loan in order to pay off the first. Despite this research, the CFPB actually rolled back restrictions on predatory lending earlier in the year, an action that received a lot of backlash.
These restrictions would have required lenders to look at someone’s income and other monthly payments, such as rent, child support, or student debt, prior to giving them a loan. However, since these restrictions were rolled back, the 80% number mentioned earlier may only continue to increase.
Lisa Servon, the author of “The Unbanking of America” and a professor at the University of Pennsylvania, commented on how,
“The situation that you want to avoid is people that are getting in over their head and going into this cycle in which they’re taking out a loan, not paying it back, paying the fee again for the second loan, and again and again, until they’re paying back way more than they borrowed.”
Once again, Servon touches on the predatory nature of these loans and the financially disastrous cycle they can bring.
Who Does This Impact the Most?
For the most part, payday loans impact the working class and low-income households. It was found that 12% of Black Americans turn to high-interest loans to make ends meet annually, according to Pew, compared with 6% of Latino people and 4% of white people.
Along with these racial disparities, Pew found that payday loan use is higher among:
- People lacking a college degree
- Those who are separated or divorced
As talked about by Linda Jun, Senior Policy Counsel of Americans for Financial Reform Education Fund, “The OCC is making it easier for lenders to ignore state protections put in place to prevent the harm caused by unaffordable high-cost loans. Congress needs to stop these abuses by capping sky-high interest rates nationwide. Families are facing acute financial distress; the last thing they need is banks – or any lenders – taking advantage of the citation to snare them in a debt trap.”
Overall, predatory lending practices target those who are in dire need of financial support but seemingly can’t receive it. This leads to those people turning to payday loans and other predatory lenders to get the money they desperately need.
The Future of Predatory Lending
Lauren Saunders, the associate director of the National Consumer Law Center, a nonprofit consumer-advocacy organization, said,“People turn to them [payday loans] because they don’t have enough money. But if you’re working fewer hours, an advance or a loan doesn’t give you any extra money. It just makes next week worse. The Covid situation really highlights the weaknesses of these programs.”
Employees need financial guidance and options, otherwise, they may unknowingly turn to predatory lending practices.
Look hard at what you provide to your employees in terms of financial wellness benefits and determine whether or not you are providing the guidance and options your employees need.