The Senior’s Guide to Avoiding Payday Loans
Inside Subprime: Nov 7, 2018
By Lindsay Frankel
Senior citizens are the group least likely to use payday loans, according to 2012 data from Pew Charitable Trusts. But reports in several states show that payday loan use among seniors has been on the rise in recent years. For example, a California report from the Department of Business Oversight showed that while payday loan usage slowed overall, residents age 62 and older were using these risky loans more than any other age group. The figure nearly tripled when compared to data from the previous year, with 1 in 4 payday loans in California going to senior citizens.
2016 research from the Center for Responsible Lending also found that the number of seniors age 65 and older using payday loans in Florida nearly doubled over a decade, even though the population grew less than 10 percent. And in Ohio, an organization developed an interest-free loan program to help seniors with payday loan debt after noticing a rise in requests for help from elderly citizens. In addition, payday lenders that target seniors have been the focus of several recent lawsuits.
What are payday loans?
A payday loan is a small-dollar loan typically intended to be repaid within two weeks. The borrower uses their future paycheck as collateral. For senior citizens, the money often comes from a Social Security check or employer pension check. Lenders will ask that the borrower hold a bank account and provide identification and proof of income. Payday loans require no credit check and are processed very quickly, making them appeal to people in need of fast cash. But because many seniors are on a fixed and limited income, it can be difficult for elderly borrowers to pay back these loans on time.
Why should seniors avoid payday loans?
While payday loans seem like a short-term solution to financial stress, they typically lead to long-term debt. In fact, the Consumer Financial Protection Bureau found that nearly 50 percent of borrowers rollover their loans nine times in a year. If a borrower took out a $300 payday loan in Texas, it would cost $701 to pay it back over 5 months. While some states cap interest rates on payday loans, many have triple-digit APRs and are nearly as costly as payday loans in Texas.
Seniors should also watch out for loans called “pension advances,” which are similar to payday loans in that they are associated with APRs over 100 percent. Some companies even require the borrower to name the lender as the beneficiary on a life insurance policy, which the borrower must purchase at an additional expense.
How can seniors avoid payday loans?
Many seniors want to avoid asking friends and family for help, but leaving family members with debt can cause more financial stress than asking for help now. If requesting assistance from your family isn’t an option, explore local nonprofits dedicated to helping seniors, and check your eligibility for state assistance programs that might help cover your expenses.
Saving for retirement and developing healthy credit are some of the best defenses against needing a payday loan in the future, but it may be too late to develop good financial habits if you’re in a bind. If you need to borrow money, it’s worth checking to see if you are eligible for a lower cost loan from a local bank or credit union. You may also qualify for a lower-interest installment loan, which can actually help you build credit.
Before you rush to your nearest payday lending storefront, take a moment to research all your options. Payday loans can lead to insurmountable debt. And while some states are considering measures to limit payday lending, important elements of the CFPB’s 2017 payday lending rule are expected to be rescinded before the law goes into effect. In this political environment, it is important for seniors to be aware of all their options and avoid payday loans whenever possible.