Don’t Get Caught in a Debt Trap
LULAC Unveils Payday Loan Research
Originally published in the spring 2014 LULAC News magazine
By: Ulises Gonzalez, Senior Community Development Manager
Borrowers facing unexpected emergencies with sizeable expenses find that payday loans are an enticing and instantaneous revenue source, yet they too often pay a steep price for the convenience of cash now.
What are payday loans?
One “easy” way to get fast cash are payday loans. However, high-cost payday lending is prohibited in eighteen states and there are strict federal rules that protect service members from abusive payday lending. Why? Well a payday loan is a small-dollar loan with an average of 390% APR, that an individual is able to borrow in a store front business or on-line (which in some cases are illegal in California).
Many payday loan store fronts are located in ethnic enclaves and low-income neighborhoods and prey upon these vulnerable populations. Borrowers qualify for a payday loan as long as they show proof of income and sign a post-dated check that gives the payday lenders access to their bank account in case they default. The payday lenders do not check to see if the borrower has other bills and obligations that may make this loan unaffordable for them. If the borrower is unable to pay the loan back within two weeks, the payday lender has access to the client’s bank account and can use the blank check to collect money owed. Sounds easy, but what if you have another unexpected emergency or if you can’t pay it back in full because you have more bills to cover in a two week period?
Families’ checking accounts are often left in the red or they are forced to get another payday loan to pay for their first pay loan and get trapped in debt (paying only the fees and as payday loans have very high interest rates, borrowers have a have a hard time paying into the principle debt). In fact, the average payday borrower is stuck in the debt-cycle, repeating loans, for a total of 8-10 times. For a payday loan of $255 with a $45 fee (the norm in California), this means that a borrower ends up paying $450 in fees for a $255 loan!
LULAC’s Payday Loan Research
LULAC in conjunction with the Center of Responsible Lending conducted a research study this February and March (2014) to better understand how payday loans function, and what the impact is for borrowers. The results demonstrated the cyclical nature of the lending process, with borrowers often caught in a debt trap.
In the Los Angeles area, five LULAC field organizers interviewed 35 payday loan borrowers, of which 25 were Latina/o with low socio-economic backgrounds. Interview results found that while some borrowers were able to repay the loan quickly, many borrowers experienced difficulty clearing the balance.
Twenty-one research participants mentioned that they were “hurt” by the payday loan. Participants were asked if they had “…ever taken out a new payday loan because of an inability to pay back an existing payday loan?” and thirteen study participants said “yes.” Five study participants took eight or more loans to help cover the cost of an old payday loan within a year.
LULAC collected a story from Cassandra in Sacramento, California. She shared:
“My experience with a payday loan trapped me in a debt cycle. I took out loans to pay my taxes, health bills, and basic necessities as I was in between jobs. I was living in the San Francisco Bay and I took out a loan in Oakland, but I was not able to pay it off, so then I went to another store in San Francisco to pay off my original payday loan. Eventually, I borrowed at least 10 pay day loans and owed over $2,500 dollars. I was never offered a repayment plan to help me pay back these loans Instead, the payday loan business took all of my money from my bank account and my bank account was eventually closed out. I also had to pay bank overdraft fees because my account was negative. Years later, I was not able to open a checking account and I was handling money via saving account which was not convenient. It brings back too many memories as I was in turmoil. Don’t do it. It’s not worth it. It’s a trap!”
In April 2014, LULAC, the Center of Responsible Lending, the California Reinvestment Coalition, Dolores Street Community Services, and Mission SF Financial Community Center, and payday loan borrowers met with Director Richard Cordray of the Consumer Financial Protection Bureau (CFPB) to share payday loan stories. The CFPB will be issuing a federal rule this year to regulate payday lending. If you have a payday loan story or know of someone who would like to submit one to the CFPB please do so. Submit a payday loan complaint to the CFPB. Your voice will help ensure that the CFPB issues a strong rule to protect borrowers from abusive payday loans.
If you have any questions please contact Senior Community Development Manager Ulises A. Gonzalez for the League of United Latin American Citizens at (916) 551-1330 or send him an email.