Payday Loan Storefronts Concentrated in Disadvantaged Communities

Inside Subprime: Dec 12, 2018

By Holly Kane

Multiple studies have found that payday loan storefronts are concentrated in low-income communities and communities of color, which negatively affects those communities in the areas of job losses and economic spending.

A Howard University study of four southeastern states found that payday loan usage led to a  decline in consumer spending – people using disposable income to purchase goods and services, thereby bolstering the economy – by about $400 million on average statewide.

“Based on the locations of these lenders, it is clear that they target minority and low- to middle-income groups, and densely populated areas,” the Howard study said.

According to the Howard study, more than 80 percent of Florida’s payday loan storefronts were located in communities with a median income between $30,000 and $40,000, while nearly all of them (1,200 out of 1,277) were in communities that were more than 30 percent African-American and up to 60 percent Hispanic. In Alabama, nearly 94 percent were located in zip codes with a minority population of 20 percent or higher. In Louisiana, areas with high concentrations of payday loan stores also bore 20-percent poverty rates and up to 19 percent unemployment.

“Generally, researchers have determined that these target communities are attractive to payday lenders because of systematic neglect by traditional financial institutions,” the Howard study said.

Communities without access to traditional lines of credit or mainstream banking services are more likely to fall prey to the conveniently located promise of easy cash. A 2018 report by the Center for Investigative Reporting found that banks routinely deny home loans to people of color at a rate of up to five times as often as whites. Nearly 30 percent of U.S. households are unbanked or underbanked, according to the FDIC, meaning they either don’t have a banking account or, if they do have one, also rely on non-mainstream financial services, like payday loans.

In a separate study that cross-referenced payday loan store statistics with federal census data, researchers in California found that the state’s roughly 2,000 payday loan brick-and-mortar stores are located mostly in poor communities. In pointing out the “financial vulnerability of populations surrounding payday storefronts,” the study found that nearly two-thirds of payday storefronts were located in zip codes with poverty rates higher than the state average, while “In zip codes where the average number of payday storefronts was twice the overall average, the percentage of blacks and Latinos exceeded their share of the total state population.”

Payday lending supporters argue that even without storefronts prominently located in vulnerable communities, borrowers will turn to online lenders. But, while the prevalence of online lending is increasing, brick-and-mortar stores continue to be the primary source of payday loans, according to Pew. Three out of every four borrowers use retail storefronts exclusively, while only one in six use online lenders exclusively.

For more information on payday loans, scams, cash advances, and title loans, check out our state and city financial guides.