With millions of Americans unemployed and facing financial hardship during the COVID-19 pandemic, payday lenders are aggressively targeting vulnerable communities through online advertising.
Some experts fear that more borrowers will start taking payday loans despite their high interest rates, which has happened over the past financial crisis in 2009. Payday lenders market themselves as a quick financial fix by offering quick cash online or in storefronts – but often lead borrowers into debt traps with triple-digit interest rates of up to 300% 400%, says Charla Rios of the Center for Responsible Lending.
“We anticipate payday lenders will continue to target distressed borrowers because that’s what they’ve done best since the 2009 financial crisis,” she says.
Following the Great Recession, the unemployment rate peaked at 10% in October 2009. In April, unemployment reached 14.7% – the worst rate since monthly record keeping began in 1948 – although President Trump is celebrating the 13.3% rate improvement released on Friday.
Despite this overall improvement, black and brown workers still experience high unemployment rates. The jobless rate for black Americans in May was 16.8%, slightly higher than in April, a testament to the racial inequalities fueling protests nationwide, Reporting by NPR’s Scott Horsley.
Data on the number of people taking out payday loans will not be released until next year. Since there is no federal agency that requires states to report on payday loans, the data will be state-by-state, Rios says.
Payday lenders often let people borrow money without confirming that the borrower can repay it, she says. The lender accesses the borrower’s bank account and directly collects the money on the next payday.
When borrowers have bills to pay in their next pay period, lenders often convince the borrower to take out a new loan, she says. Research shows that a typical payday borrower in the United States is trapped in 10 loans per year.
This debt trap can lead to bank penalties for overdrawn accounts, damaged credit and even bankruptcy, she says. Some research also links payday loans to worse physical and emotional health outcomes.
“We know that people who take out these loans will often be stuck in a kind of quicksand of consequences that lead to a debt trap that they find it extremely difficult to get out of,” she says. “Some of these long-term consequences can be really disastrous.”
Some states have prohibited payday loanarguing that this leads people to incur unpayable debts due to high interest charges.
The State of Wisconsin regulator has issued a statement warning payday lenders not to increase interest, fees or costs during the COVID-19 pandemic. Failure to comply can result in license suspension or revocation, which Rios says is an important step given the potential damages of payday loans.
Other states like California cap their interest rates at 36%. Across the country, there is bipartisan support for a 36% rate cap, she says.
In 2017, the Consumer Financial Protection Bureau released a rule that lenders must review a borrower’s ability to repay a payday loan. But Rios says the CFPB could override that rule, leading borrowers into debt traps — forced to repay one loan with another.
“Although payday marketers present themselves as a quick financial fix,” she says, “the reality of the situation is that more often than not people are stuck in a debt trap that has led to bankruptcy. , which led to re-borrowing, which led to damaged credit.
Christina Kim produced this story and edited it for broadcast with Tinku Ray. Allison Hagan adapted it for the web.