Payday Loans Harm the Very Populations They Target
Inside Subprime: Dec 12, 2018
By Holly Kane
Payday loan providers market their product as an easy route to quick cash, whether for the end-of-month financial crash diet to make rent, a medical emergency for the un- or underinsured, or paying the electric bill to keep the heat on in the dead of winter. But research shows these loans disproportionately hurt the exact populations they target – the financially vulnerable – by trapping those who are statistically already at an economic disadvantage in a cycle of debt.
A payday loan, defined by the CFPB as a “short-term, high cost loan, generally for $500 or less, that is typically due on your next payday,” is usually marketed as a temporary solutions for cash-strapped emergencies, but studies have found that most borrowers renew or roll over their loans for a fee.
“[S]even in 10 borrowers use payday loans to deal with recurring expenses, while only one in six uses the loans for unexpected emergencies,” according to a study by Pew Charitable Trusts. “[T]he vast majority of borrowers use the loans on a long-term basis, not a temporary one.”
The Pew study found that those without a college degree, home renters and those earning less than $40,000 per year are more likely to take out payday loans than other groups. The CFPB reported that more than 80 percent of payday loans are renewed or rolled over within 14 days, indicating that borrowers within these groups are unlikely to have received another paycheck within that two-week period.
“The short-term structure of payday loans causes borrowers to opt to pay back payday lenders before paying medical bills, rent, utilities, and other expenses,” according to a study by the Howard University Center on Race and Wealth.
At a time when housing costs far outpace wages, more than half of payday loan users rent their homes. In no county in the U.S. can a worker earning the federal minimum wage of $7.25 an hour afford a modest two-bedroom living situation working a 40-hour week, according to a report by the National Low Income Housing Coalition. Further, those earning $40,000 or less annually are three times as likely to have used payday loans as those earning $50,000 or more. These earners are less likely to have emergency savings to cover a car repair or illness, making them prime candidates for payday lenders.
Part of the reason vulnerable populations are prone to take out payday loans is due to borrowers’ diminished access to traditional forms of credit. Research shows that in the absence of using payday loans, 81 percent of respondents would cut back on expenses, while 62 percent would delay paying bills. Getting a bank loan and using a credit card – two options charging significantly less interest – were two of the least popular responses, according to the Pew study.
“Thus it seems that the payday loan industry is selling a product that few people use as designed and that imposes debt that is consistently more costly and longer lasting than advertised,” the Pew study said.