It’s a painful, all-too-familiar tale. After her husband lost his job, Pamela Gomez of Phoenix, Arizona, knew the family’s finances were in immediate trouble; enough trouble that she borrowed a rather modest payday loan of $500 from a local payday lender.
The “all-too familiar” part really ramps up when Pamela found that she, like countless other borrowers, couldn’t repay the $588 they owed (the $500, plus the $88 in fees) within the contractually agreed-upon two weeks. To cover that loan, Pamela felt forced to take out a second payday loan elsewhere, then a third to pay off the second, and so on, until she had five different payday loans of $500. In no time she was paying $880 every single month in fees, and never coming close to paying down the principal owed.
Pamela and her husband eventually paid $10,560 in interest on just those five payday loans. Fearful of actually going to jail if she stopped paying the fees, she had no idea how to get out of this perpetual debt trap.
Predatory payday loans, by their very design . . .
Financial tragedies like Pamela’s have been, unfortunately, regular occurrences across the United States since Allan Jones first founded the payday lending outfit Check-Into-Cash 31 years ago.
Incorporating a business plan predicated on taking advantage of the most vulnerable consumers, these businesses stack the deck with their now-common two-week repayment requirement. Fully aware, and even depending on, the borrower having less than a realistic or practical ability to pay back the loan in that limited timeframe, the lender stands ready to “help” the borrower roll-over their loan and then jack up the annual percentage rate (APR), sending the vulnerable borrower down the debt trap.
Payday lending is, by its very design, meant to exploit vulnerable American consumers, often trapping them in cycles of debt with exorbitant, blatantly unrealistic fees including APRs averaging 391 percent, nationally. Reflexively, both state and federal regulators have tried to manage and set guardrails for those rates and, in some states, ban the use of those bad-faith products altogether. Such efforts have been somewhat effective: As of March 2024, 14 states and the District of Columbia prohibit payday lending, while 27 states still allow it, and nine others allow some form of short-term lending with restrictions.
According to Bankrate, one in five borrowers, on average, default on their payday loans. Additionally, more than half of all borrowers who get their loans from an online lender default on their balance. Ultimately, 80 percent of payday borrowers tracked over 10 months rolled over or reborrowed payday loans within 30 days.
There is no legitimate debate when it comes to the financially unhealthy and legally corrupt industry that is payday lending in the United States.
The difference is getting our nation’s credit unions to consistently educate their communities’ members and consumers to both recognize the dangers of predatory payday lending and then recalibrate their knowledge of how and where to access safe and responsible small-dollar loans when experiencing an emergency.
Identifying payday lenders’ red flags
For those consumers in need of immediate financial relief, signs of a lender’s duplicity or contract details tend to go unnoticed or outright ignored, especially when they’re trying to get fast funds as quickly and easily as they can.
First, let both your members and potential members know and understand that they can easily enquire about responsible small-dollar loans right there at your credit union. Even if they’re away from a branch, they can still get a small-dollar loan through your credit union’s mobile app due to digital platforms like QCash.
Let’s say, however, they’re in a physical location that prohibits them from leveraging those resources. Here are some indicators from U.S. News that consumers can keep in mind to avoid being taken advantage of by a predatory payday lender:
- The offer is simply too good to be true
Predatory payday lenders may offer the consumer terms that just seem too good to be true, pressure them into exorbitant loans, or try to sell them products and services they don’t need. “These types of products generally include very high interest rates as well as excessive fees and penalties that could make it difficult or almost impossible to pay back,” says Tara Alderete, director of enterprise learning at Money Management International, a nonprofit financial education company.
- High APRs and fees
APRs that indicate a loan’s annual cost come with payday loans and title loans, and often unveil themselves in the triple digits along with steep fees that dramatically increase costs and purposely force the consumer to re-borrow or “roll-over” the loan, which is the lender’s foundational intent. According to consumer advocates, 36 percent or less is considered responsible and practical for a small-dollar loan.
- Easy approval, surrendered assets
Sound, responsible lenders, like your credit union, check borrowers’ credit, verify their income, and dig into their monthly financial obligations to make sure they can in fact repay the prospective loan. Predatory lenders who bypass these inquiries instead ask the customer to put up collateral like a car title, or require access to their checking account. If the borrower can’t pay back the loan, then those surrendered assets will be at risk.
- Unbalanced, expensive loan terms
Certain lending features, in addition to the APR, can raise the cost of borrowing. For example, negative amortization causes the loan balance to grow rather than shrink because the borrower isn’t paying enough to cover the interest. Another example would be a lump-sum balloon payment due at the end of the loan that becomes unmanageable, particularly on a short-term loan.
- Roll-over arrangements
Predatory payday lenders’ most infamous tactic: taking advantage of borrowers who cannot pay back the loan in such limited time by convincing them to repeatedly refinance, or roll-over, their loan in order to charge more money from high origination fees, closing costs, prepayment penalties on the old loan, and more.
Helping members understand better small-dollar alternatives
Fortunately, payday lending isn’t the only game in town. The challenge is educating the 12 million Americans who take out payday loans each year to the tune of $9 billion. With helpful insight from Experian, we offer the following small-dollar lending alternatives to predatory payday loans:
- Payday Alternative Loans (PAL)
National Credit Union Administration-affiliated credit unions provide safe, responsible, and stabilizing Payday Alternative Loans (PALs). Members can use the money from a PAL to outright avoid a risky payday loan or pay off a current one. These low-cost PALs give a borrower more time to pay off the loan than a payday loan, and at a much lower interest rate.
- QCash digital small-dollar loans
Digital services have become a leading access point for credit union members to manage their finances, and that includes small-dollar loan products. By partnering with your credit union, QCash mobile lending reaches your credit union members where they are, 24/7, with approved deposit into their account within seconds so they can take care of life’s sudden emergencies in real-time, on-site, when they need it most.
- Consider a cash advance from a credit card
Certainly not the first or favored option, considering the damage that can be done to a member’s credit score if things go sideways, but a credit card cash advance typically charges a lower interest rate than a predatory payday loan. Don’t be surprised, however, when the APR for a cash advance is higher than the APR for purchases made on the same card. If you believe you can pay back the loan amount regularly and on time, a credit card cash advance could be a stabilizing way to go.
Predatory payday loans have laid waste to millions of vulnerable consumers in the last 30 years, and despite moves and rules by federal agencies to curb the damage in recent years, they’re still finding ways around those rules to continue their bad-faith assault on Americans’ financial health and credit scores.
Help those members and consumers discover a better way by working with QCash to offer them instant and easy access to fast funds, right from the device in their pockets. Feel free to View a Demo of our product or Contact Us to get started immediately.
Next week, QCash will be discussing how to decipher credit scores and reports, and how they can help build good credit.
