Personal Loans are Commerce Secretary’s Suggestion for Furloughed Federal Workers
Inside Subprime: Jan 28, 2019
By Aubrey Sitler
On January 25, the longest federal government shutdown ever may have ended (at least for the next three weeks), but the brutal financial impacts it has had on the 800,000 federal employees who were either furloughed or working without pay and missed their last two paychecks will continue to endure, at least until their back pay is issued — if not longer.
As families and individuals affected by the shutdown tried to navigate their lives with no additional income for the past five weeks, many turned to local food banks and shelters for assistance meeting their basic needs.
In responding to questions about the shutdown’s financial impacts last Thursday morning, Commerce Secretary Wilbur Ross told CNBC’s “Squawk Box” that he didn’t get why people would need to turn to those resources: “I know they are [going to homeless shelters] and I don’t really quite understand why because as I mentioned before, the obligations that they would undertake – say borrowing from a bank or credit union – are in effect federally guaranteed…So the 30 days of pay that people will be out – there’s no real reason why they shouldn’t be able to get a loan against it, and we’ve seen a number of ads from the financial institutions doing that.”
In short, Secretary Ross, whose net worth is a reported $700 million, indicated that no- or low-cost personal loans could be the answer for every federal employee facing a financial crisis in the face of the shutdown.
While there are some big banks waiving fees and offering the kinds of no-interest loans that Ross mentioned in his interview, but not every bank is doing this, and not every offer is the same. For example, interest may still accrue, even for loans whose payments are deferred. Furthermore, for the federal employees who bank with financial institutions that are not offering any assistance, those workers may not get the same treatment by competing banks, even if they open new accounts.
Second, while Ross is correct that the federal government has guaranteed federal employees’ back pay, there are two major caveats to this: Federal contractors are unlikely to get any back pay, and even for the federal employees who are, there is not yet a set timeline by which feds will definitely be paid for their surprise 5 weeks without pay. So, even with the promise of impending payment for those that will get it, it may not be financially responsible for a federal employee to take out a short-term loan with a quick payback period — especially if that lender is a predatory lender, such as a title lender or a payday loan firm.
Finally, it is easy to go to the wrong place seeking a personal loan, especially when in a financial crisis, and predatory lenders thrive in these kinds of environments. For those whose banks are not helping them with no- or low-interest loans and deferred payments, it may seem like a good idea to turn to a payday loan company — but those agreements usually come with extraordinarily high fees and 400 percent APRs. With no guaranteed timeline for back pay, those fees can get unmanageably high, and fast.
At the end of the day, those who are struggling to pay rent, put food on the table, and buy diapers due to the shutdown can only keep doing the best they can — including visiting places like food pantries that are provided to our neighbors in need when anything from life circumstances to bureaucratic inefficiency keep them from adhering to Ross’s tactics to stay afloat.