Are payday loans a good source of emergency cash? Thanks to misleading marketing, many of its consumers unfortunately think so.
“Payday lending stores are opening their doors in low-income neighborhoods at a rate equal to Starbucks [opening its doors] in affluent ones,” states NAACP Chairman Emeritus Julian Bond to illustrate how payday lenders are rapidly sinking their roots into our communities.
Many payday loans trap consumers by encouraging them to repeatedly pay high fees for borrowing small amounts of money. The average loan size is $375; but borrowers end up paying about $520 in interest. And repeat borrowers, many who secure an additional loan to pay back their previous loan, account for 91 percent of all payday loans per year.
Mass predatory lending products and deceitful financial practices contributed to the 2007 financial crisis. However, with foreclosures being the focal point of the crisis, payday lending has not been discussed as prominently– until now.
Payday lending’s economic impact cannot be understated as it drains the economy significantly. A recent study by the Insight Center shows that in 2011, payday loans cost the U.S. economy nearly one billion dollars and thousands of jobs. Payday loans reduce household spending by taking away money that consumers could spend on businesses, which in turn fuels business growth and job creation.
Consumer advocates, along with state and local governments, are initiating efforts to protect consumers from these types of “debt traps” in disguise. The Obama Administration established the Consumer Financial Protection Bureau (CFPB) to help protect consumers from the disastrous financial products on Wall Street that financed and contributed to the greatest losses of wealth for the average American in modern history.
Recently, the CFPB released their initial findings on payday loans. Their report found that these loans are not used regularly for emergency cash – which could be easily paid back in a short period of time – but rather by those who do not have enough income to meet their regular expenses. The study concludes, “These loans raise substantial consumer protection concerns.”
This study proves that small dollar high-cost lending is predatory and unfairly targets the economically weakest members of our community. They exploit consumers’ inability to meet their regular financial obligations while stripping wealth from segments of our society that can ill afford it.
Financial institutions, including Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), have joined the CFPB in cracking down on the banks it oversees by issuing guidelines on their payday products called deposit advance loans. These guidelines require banks to better assess the customer’s financial capability to pay back a loan so the consumer can better avoid being caught in a debt trap. They also require that each deposit advance loan be repaid in full before issuing another deposit advance loan; and that banks cannot offer more than one loan per monthly statement cycle.
At the NAACP, we engage the community around predatory payday lending by connecting NAACP state and local units with CFPB national field hearings and representatives and hosting fair lending workshops nationwide to inform consumers of how to beware of these debt traps.
Whether payday loans are dispersed through storefronts or well-respected financial institutions, accountability is key. We are encouraged that government agencies, along with other consumer advocacy groups, are moving on all fronts to protect our communities from economic exploitation. Economic empowerment and justice are at the root of advancing racial equity. And we must eliminate barriers to economic justice like predatory payday lending, which weakens the economies of so many Americans.
Dedrick Muhammad is the Sr. Director of the NAACP Economic Department and Charles Lowery is the NAACP Director of Fair Lending.