Payday loan borrowers more likely to rate their health poorly

Inside Subprime: April 19 2018

By Lindsay Frankel

New research conducted by Ph.D. students at University of Washington has revealed that people who borrow from payday lenders are 38 percent more likely to self-rate their overall health as poor or fair.

Participants of the study were asked to rate their general health as “poor/fair” or “good/very good/excellent,” and their answers were compared with groups that had similar backgrounds with regards to income, education, race and ethnicity. People with existing disabilities or self-rated poor health prior to borrowing were excluded from the study. Researchers found that people who borrowed from payday lenders or did not have access to traditional banking services rated their health worse than people who did not use these kind of predatory short-term loans.

“This research adds to the growing evidence that connects specific kinds of household debt and financial exclusion to poor health,” the researchers noted.

The study, published in Health Affairs, is one of the first to examine associations between short-term loan products and health. Prior research has focused on the financial consequences of borrowing from high-interest loan companies, or the health effects of general debt. Jerzy Eisenberg-Guyot, lead author of the study, explained that previous research did not specifically analyze how payday loans affect self-ratings of health.

The researchers added that “future research should explore in more depth how the two-tier US financial system – one for the wealthy and one for the poor – affects health and worsens health inequalities.”

The payday loan industry has boomed in recent decades since community banks and other resources have begun to shut down and politicians have relieved restrictions on payday lending. The study revealed that only $10 billion in short-term loans were issued in 1998, compared to $48 billion in 2011.

The payday lending business model relies on low-income individuals with bad credit who can’t cover their expenses in an emergency. These people frequently become trapped in a cycle debt that they cannot pay back in the short term, resulting in annual interest rates of up to 600 percent.

But while consumer advocates and voters alike have pushed for tighter regulations on payday loans, the Consumer Financial Protection Bureau under the current administration has withdrawn consumer protections and halted investigations into disreputable business practices. Politicians in many states have decided towards deregulation of the industry.

For example, the Florida Legislature recently approved a bill that would increase the limit on payday loans in Florida from $500 to $1,000. This decision was made despite suggestions from consumer advocates that the increase would cause further financial harm to low-income individuals.

Consumers need to be aware of the potential financial risks of taking out a payday loan as well as the impact on health noted in the study. Wherever possible, borrowers should seek alternatives to high-interest loans in order to avoid these detriments.

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