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.
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.
Work to commute
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.”
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.
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.”
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.
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.