Who Do Payday Loans Target and Why?
Inside Subprime: Dec 4, 2018
By Lindsay Frankel
Payday loans are considered predatory because they carry deceptively high interest rates that trap borrowers in debt, which benefits lenders and harms borrowers. Payday loans are advertised as emergency solutions, but most people use them for recurring expenses. The combination of short terms and high interest rates make default likely, especially for those already struggling to make ends meet. And payday lenders are known to target vulnerable populations, such as the elderly, low-income families, minorities, people with disabilities, and military members.
According to 2012 data from Pew Charitable Trusts, senior citizens use payday loans less than any other age group. But many permissive states have seen an increase in payday loan usage rates among seniors, including California, Florida, and Ohio. Recent lawsuits have also been brought against payday loan firms considered to target seniors.
Pension advances, which are similar to payday loans, allow retirees to borrow money in exchange for a portion of their pension checks. These loans also carry exorbitant interest rates that can harm seniors on a fixed-income budget.
Payday lending storefronts are more prevalent in low-income communities. Research revealed that payday lenders are concentrated in low-income neighborhoods in Michigan and Texas, among other states. That’s because business booms in these areas, where low-income families with bad credit have few alternative options for borrowing.
While the average payday loan takes up 36 percent of a borrower’s gross paycheck, research from Pew Charitable Trusts shows that most people trying to cover their everyday expenses can afford to pay no more than 5 percent. The CFPB found that 80 percent of borrowers rollover their payday loans as a result. These borrowing behaviors are highly profitable for the payday loans industry and harmful for low-income consumers.
The payday loan debt trap disproportionately affects communities of color. According to Pew research, 12 percent of African Americans and 6 percent of Hispanics have used a payday loan, when compared to 4 percent of whites. And analysis of payday lending storefront locations in Arizona shows a pattern of payday lenders setting up shop in communities of color. Payday lenders target minority populations because they are often lower-income and have lower levels of financial literacy. Unfortunately, these populations are also at the greatest risk of incurring financial harm from payday loans.
People with Disabilities
12 percent of disabled people have used a payday loan, according to Pew research. That’s even higher than the percentage of unemployed people who have used payday loans (10 percent). Payday lenders have been criticized for taking advantage of Social Security beneficiaries, often opening storefronts nearby government-subsidized housing. The guaranteed monthly income of a Social Security check is appealing to payday lenders, but people with disabilities are already strapped for cash, and payday loans only exacerbate the problem.
Payday lending storefronts are also highly concentrated around military bases. Payday lenders target military service members and their families at double the rate at which they prey on civilians, according to The Wall Street Journal. And while the Military Lending Act carries protections for service members, including capping interest rates at 36 percent, CFPB acting director Mick Mulvaney proposed halting examinations of lenders for violations. Military advocates have encouraged stricter oversight of payday lenders, but the Trump administration’s policies have moved towards deregulation of the industry. As lenders run amok without the threat of discipline, service members need to be especially cautious of payday loans.
While these targeted groups often have limited options when it comes to borrowing, there are better alternatives to payday loans. Securing additional income and setting up a savings plan may be the best defense against needing to borrow, but it’s also worth seeking assistance from government programs, nonprofit organizations, or banks and credit unions. Borrowers with bad credit should also consider a lower-cost installment loan, which helps to build credit, before taking out a payday loan.