Most want to avoid payday loans, which offer quick cash against future paychecks without a credit check and come with an interest rate above 500%. But the rapidly increasing prices of food, fuel and rent gives them few options.
To predatory payday lenders, however, they signal happy days and good times ahead.
Given the economic dynamics at play, Fisher said his company has “meaningfully leaned into the demand with our marketing efforts,” and spent more to attract new customers. That has paid off. About 44% of all loans were issued to new customers in the last quarter, he said.
Working to drive to work
For those Americans, high-interest payday loans are still easily accessible. These small-dollar amount loans, typically 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 is all most borrowers need to walk out with cash in hand.
Current data that tracks the number of payday loans has yet to be released, but based on past trends there is likely an increase in borrowing, said Alex Horowitz, principal officer for Pew’s consumer finance project. “Our survey data shows that about 70% of payday loan borrowers use the loan primarily for routine expenses and to cope with increased or volatile expenses.”
The debt trap
These loans are often incredibly expensive but borrowers either lack the financial literacy to seek out alternatives or don’t think they have any other option. There is currently no federal cap on maximum interest rates for small-dollar loans. Not all states allow them, and it is up to that states that do to decide whether they’ll implement their own caps.
Companies that offer high cost loans say they provide a needed service to low income communities by issuing loans to Americans that traditional banks refuse to serve. They claim the high interest rates are necessary because of the high risk of default. But consumer advocates say this is a false narrative.
Seven large US banks, including Bank of America, Wells Fargo and Truist, have created programs that offer small-dollar borrowing options with low annual interest rates, Horowitz said. They plan to look at banking history — not credit scores — to determine who qualifies 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 that have 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 repealed major parts of a 2017 rule that required lenders to evaluate consumers’ ability to repay loans. The rule, they said, would have wiped out much of the money they make from borrowers who miss payments on their loans. By repeating portions of the rule, the CFPB said it would ensure “the continued availability of small-dollar lending products for consumers who demand them.”
Buy now pay later
Advocates also worry about new forms of lending that have emerged in recent years that are generally much less regulated than even payday lending.
Buy now, pay later (BNPL) companies saw their total market share grow between 200% and 350% during the past two years, according to the Center for Responsible Lending. Now companies including Klarna and Zip are partnering with Chevron and Texaco to allow Americans to fill their tanks now and pay in installations over six weeks.
These companies don’t brand themselves as lenders. BNPL is not credit but debit, with repayments taken automatically from customers’ bank accounts and no interest or fees.
In California, 91% of consumer loans made in 2020 were BNPL loans, and 24% of financially vulnerable BNPL recipients report challenges making payments.
BNPL lenders are not required by law to determine a borrower’s ability to repay loans. There are no regulations regarding the disclosure of fees for late payments, account reactivation or rejected payments.
“If people are using a credit product like this for their basic needs I’m concerned,” Chabrier said. She worries that because BNPL customers are able to open multiple loans at once, they could lose track or have difficulty paying them all back.
“Many people use buy now and pay later to stack their purchases through multiple vendors,” Chabrier said. “Because of the lack of underwriting and the consideration of whether or not they can pay for these items, it becomes really unaffordable for them.”
Klarna caps late fees at 25% of the purchase amount, a far cry from the 400% interest rates payday lenders charge, but Chabrier sees this as a less severe symptom of a larger problem.
“They’re continuing this process of extracting money from low-income people,” she said. “If people have less buying power with their wages it will just get worse.”
Back in Mississippi, which has the highest rate of poverty in the country, Jones has struggled to keep distressed callers out of the hands of loan sharks and into financial literacy 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 nation, mostly in low-income areas or in communities of color.
Payday lenders are so prevalent in Mississippi, Jones said, that they outnumber McDonald’s restaurants by more than 5 to 1.