Thursday, August 11 2022

Most want to avoid payday loans, which offer quick cash against future paychecks with no credit checks and come with an interest rate in excess of 500%. But the rapidly rising prices of food, fuel and rent leave them with few options.

To predatory payday lenders, however, They signal happy days and good times.

“Low unemployment plus inflation generally means consumers need credit for additional capital to deal with unexpected spikes and expenses while making money to pay off those loans,” said David Fisher, CEO of Short-Term Subprime Lender Enova (ENVA) said during one Earnings call in May. The company beat quarterly earnings estimates by 7.7%.

Given the economic dynamics at play, Fisher said his company “has sensibly responded to demand with our marketing efforts” and has spent more to attract new customers. That paid off. Around 44% of all loans were made to new customers in the most recent quarter, he said.

This surge in first-time borrowers came as US consumer inflation hit its highest level in more than four decades and Americans were struggling to put food on their tables and gas in their tanks.

Work to go to work

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

For these Americans, high-interest payday loans are still easily accessible. These small loans, usually between $100 and $1,000, are available in more than half of all US states with little regulation. Proof of income and a bank account are all most borrowers need to step out of the house with cash in hand.

Actual data tracking the number of payday loans has yet to be released, but based on past trends, borrowing is likely to increase, said Alex Horowitz, chief executive of Pew’s consumer finance project. “Our survey data shows that approximately 70% of payday loan borrowers use the loan primarily for routine expenses and to manage increased or volatile expenses.”

The Debt Trap

These loans are often incredibly expensive, but borrowers either lack the financial literacy to look for alternatives or don’t believe they have another option. There is currently no federal cap on maximum interest rates for small loans. Not all states allow them, and it is up to states to decide whether to introduce their own caps.

In the 32 US states that allow payday loansAverage annual interest rates range from 200% in Minnesota to 664% in Texas.
Borrowers often cannot repay the full amount of the loan when it is due, usually in two to four weeks, leading them to take out a second loan with additional fees. This creates a debt cycle that is difficult to break. Almost 1 in 4 payday loan recipients take out additional loans nine times or more the Consumer Financial Protection Bureau.
Studies show that black and Hispanic communities are being disproportionately targeted by providers of expensive credit. In Michigan, where the average interest rate on payday loans is 370%, there are 7.6 payday businesses per 100,000 residents in areas where more than a quarter of the population is Black and Hispanic. That is about 50% more than in other areas, according to the Center for Responsible Lending.

Companies that offer expensive loans say they provide a needed service to low-income communities by extending loans to Americans that traditional banks don’t offer. They claim that the high interest rates are necessary because of the high risk of default. But consumers Proponents say this is a false narrative.

Seven major U.S. banks, including Bank of America, Wells Fargo and Truist, have developed programs that offer small loan options with low annual interest rates, Horowitz said. They plan to look at bank history — not credit scores — to determine who is eligible for loans.

“There are 18 states and the District of Columbia that have banned payday loans and have survived just fine without these predatory lending products,” said Nadine Chabrier, senior policy counsel at the Center for Responsible Lending. “There are fair and responsible lending products with low interest rates and fees that are available that people can take advantage of.”

Shortly after the Covid-19 pandemic hit the US, the Consumer Financial Protection Bureau rescinded much of a 2017 rule that required lenders to assess consumers’ ability to repay loans. The rule, they said, would have wiped out much of the money they make from borrowers who default on their loans. By repealing portions of the rule, the CFPB would ensure “the continued availability of small-dollar credit products to consumers who demand them.”

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

Buy now, pay later

Proponents are also concerned about new forms of lending that have emerged in recent years and are generally much less regulated than even payday loans.

Buy now, pay later (BNPL) companies have seen their overall market share increase by between 200% and 350% over the past two years, according to the Center for Responsible Lending. Now companies like Klarna and Zip are partnering with Chevron and Texaco so Americans can fill their tanks now and pay in installments over six weeks.

BNPL clients are typically millennials and Gen Z-age, and two-thirds of applicants are subprime borrowers, according to the research results by Marshall Lux, a research fellow at Harvard Kennedy School.

These companies do not describe themselves as lenders. BNPL is not a loan, but a direct debit, with repayments being automatically debited from customers’ bank accounts with no interest or fees.

In California, 91% of consumer loans granted in 2020 were BNPL loans, and 24% of financially vulnerable BNPL recipients report struggling to make payments.

BNPL lenders are not legally required to determine a borrower’s ability to repay loans. There are no regulations regarding disclosure of fees for late payments, account reactivation, or rejected payments.

“When people use a loan product like this for their basic needs, I worry,” Chabrier said. She worries about this because BNPL clients can open multiple Loans at once, you could lose track or struggle to repay them all.

“A lot of people use buy now pay later to stack their purchases from multiple vendors,” Chabrier said. “Due to the lack of underwriting and considering whether or not they can pay for these items, it becomes really prohibitive for them.”

Klarna limits late fees to 25% of the purchase amount, a far cry from the 400% interest that payday lenders charge, but Chabrier sees this as a less severe symptom of a larger problem.

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

Back in Mississippi, which has the highest poverty rate in the country, Jones has worked to keep distressed callers out of the hands of loan sharks and into financial education programs sponsored by local banks. But it’s difficult 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 country, mostly in low-income areas or communities of color.

Payday lenders are so common in Mississippi, Jones said, they outnumber McDonald’s restaurants by more than 5 to 1.

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