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Most want to avoid payday loans, which offer quick cash against future paychecks without a credit check and come with interest rates above 500%. But rapidly rising prices for food, fuel and housing rent leave them no choice.

Predatory creditors before payday, However, they signal happy days and good times ahead.

“Low unemployment plus inflation usually means that consumers may need loans for additional capital to cope with unexpected surges and expenses while earning money to pay off those loans,” said David Fisher, CEO of a short-term subprime lender. Enova (ENVA) said during May earnings report. The company beat quarterly earnings estimates by 7.7%.

Given the economic momentum, Fischer said his company was “largely leaning on demand through our marketing efforts” and spending more on acquiring new customers. It paid off. According to him, about 44% of all loans were issued to new clients in the last quarter.

This increase in new borrowers came as US consumer inflation hit its highest level in over four decades and Americans struggled to put food on their tables and gasoline in their tanks.

Work to commute

The national average for a gallon of gasoline is just under $5, which is 61% more than last year. The jump comes just as many employers are requiring workers to return to in-person work. Meanwhile, the federal minimum wage is still $7.25 an hour, the same as it has been since 2009. Low-paid workers have to work about 14 hours to fill their tank.
About two-thirds of Americans now live paycheck to paycheck. June LendingClub Poll found. This number rises to 82% among workers earning less than $50,000.
The average credit rating of low-income US residents is also declining. according to LendingClub. About 40% of Americans earning less than $50,000 and living paycheck to paycheck have a subprime credit score below 650, making it difficult for them to get a loan from a traditional lending institution or qualify for additional rights. credit. The average credit score in the US is 714, according to Experian.

For these Americans, high-interest payday loans are still readily available. These loans are for small dollar amounts, usually between $100 and $1,000, available in more than half of all US states with little regulation. Proof of income and a bank account is all most borrowers need to walk away with cash on hand.

The current data, which tracks the number of payday loans, has not yet been released, but based on past trends, borrowing is likely to rise, said Alex Horowitz, chief director of Pew’s consumer finance project. “Our survey data shows that about 70% of payday loan borrowers use the loan primarily for day-to-day expenses and to cover increased or unstable expenses.”

debt trap

These loans are often incredibly expensive, but borrowers either don’t have the financial literacy to look for alternatives or don’t think they have any other option. There is currently no federal cap on maximum interest rates on small dollar loans. Not all states allow them, and it is up to those states to decide if they will impose their own restrictions.

32 US states allow payday loansaverage annual interest rates range from 200% in Minnesota to 664% in Texas.
Borrowers often fail to repay the entire loan amount on time, usually within two to four weeks, which results in them taking out a second loan with additional fees. This creates a debt cycle that is difficult to break. Almost every fourth recipient of a payday loan take out additional loans nine times or more The Consumer Financial Protection Bureau found.
Research shows that black and Hispanic communities are disproportionately targeted by expensive loan providers. In Michigan, where the median interest rate on payday loans is 370%, there are 7.6 payday stores for every 100,000 people in areas where more than a quarter of the population is black and Hispanic. This is about 50% more than in other areas. according to the Center for Responsible Lending.

High-priced loan companies say they are providing needed services to the underprivileged by giving Americans loans that traditional banks refuse to service. They argue that high interest rates are necessary because of the high risk of default. But the consumer defenders say this is a false narrative.

Seven major US banks, including Bank of America, Wells Fargo and Truist, have created programs that offer low-interest, small-dollar loan options, Horowitz said. They plan to study banking history, not credit ratings, to determine who is eligible for a loan.

“There are 18 states and the District of Columbia that have banned payday loans and have done just fine without these predatory loan products,” said Nadine Chabrier, senior policy adviser for the Center for Responsible Lending. “There are honest and responsible loan products with low interest rates and fees that are available and that people can use.”

Shortly after the Covid-19 pandemic hit the US, the Consumer Financial Protection Bureau lifted major parts of a 2017 rule that required lenders to assess consumers’ ability to repay loans. The rule, they say, would wipe out much of the money they make from borrowers who miss payments on their loans. In waiving parts of the rule, the CFPB said it would ensure “small dollar loan products are always available to consumers who need them.”

In a blog post, Former CFPB director Dave Wajo expressed concern about the rule changes, saying he had problems with “any lender’s business model that depends on consumers being unable to repay their loans”.

Buy now, pay later

Proponents are also concerned about new forms of lending that have emerged in recent years, which tend to be far less regulated than even payday loans.

According to the Center for Responsible Lending, over the past two years, the share of “buy now, pay later” (BNPL) companies has grown by 200-350%. Now companies like Klarna and Zip are partnering with Chevron and Texaco to let Americans fill up their tanks now and pay in installments within six weeks.

BNPL’s clients tend to be millennials and Gen Zers, and two-thirds of applicants are subprime borrowers. according to research Marshall Lux, Fellow at the Harvard Kennedy School.

These companies do not position themselves as lenders. BNPL is not a credit, but a debit, with payouts made automatically from customers’ bank accounts and with no interest or fees.

In California, 91% of consumer loans issued in 2020 were BNPL loans, and 24% of financially vulnerable BNPL recipients report payment problems.

BNPL lenders are not required by law to determine a borrower’s ability to repay a loan. There are no rules regarding the disclosure of fees for late payments, account reactivation, or declined payments.

“If people use such a loan product for their basic needs, I am concerned,” Chabrier said. She is concerned that since BNPL clients may open multiple loans right away, they may lose an account or have difficulty paying them all back.

“Many people use ‘buy now, pay later’ to stack their purchases from multiple vendors,” Chabrier said. “Because of the lack of underwriting and considering whether they can pay for these items, it becomes really out of reach for them.”

Klarna caps late fees at 25% of the purchase amount, a far cry from the 400% interest rate charged by payday lenders, but Chabrier sees this as a less severe symptom of a larger problem.

“They continue this process of extracting money from people with low incomes,” she said. “If people have less purchasing power with their wages, things will only get worse.”

Back in Mississippi, which has the highest poverty rate in the country, Jones fought to keep distressed subscribers out of the hands of loan sharks and enroll them in financial literacy programs sponsored by local banks. But it’s hard to work against so many payday lenders with huge advertising budgets, she said. The state has the highest concentration of payday lenders per capita in the nation, mostly in low-income areas or communities of color.

Payday lenders are so common in Mississippi, Jones said, that they outnumber McDonald’s restaurants by more than 5 times.

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