American voters have spoken – and not just for the next president. They also support the crackdown on what some see as predatory loans, especially in the form of payday loans. In the November election, South Dakotas voted to cap interest rates on short-term loans at 35%. With the vote, South Dakota joins 18 other states and the District of Columbia in capping the amount of interest lenders can charge on payday loans.
Payday loans are small loans that allow you to borrow against a future salary. This option comes at a high price, however, as the interest rates associated with these loans – in part because many people are unable to repay them on time – are incredibly high. Payday loans are prevalent in low income communities, and these lenders have come under fire for their treatment of low income borrowers. These borrowers may need additional cash to cover their monthly expenses, but at the same time, they are not able to repay payday loans on time, causing them more and more debt to payday lenders.
How it all works
Borrowers typically give their bank account information to the payday lender, who will debit the money owed from the borrower’s account when due. Payday lenders operate from storefront and online businesses, providing clients with 24-hour options to access money this way.
The minimum age to borrow a payday loan is 18 years old. But just because teens can borrow money this way, doesn’t mean they have to rush to use this type of loan without understanding the financial ramifications. In September 2015, a British teenager made headlines when he committed suicide after allegedly losing a large chunk of his bank account to a payday lender known as Wonga. This and other less drastic cases have increased the scrutiny of the payday lending industry.
While a study by Pew Charitable Trusts found that 25-44 year olds make up the majority of payday loan borrowers, 5% of 18-24 year olds borrowed money this way. When they do, they can harm their financial future by getting trapped in a cycle of debt because they either do not understand how these loans work or underestimate their ability to repay them.
Payday loan amounts typically range between $ 100 and $ 500, with an average loan of around $ 375, according to the Pew Charitable Trusts. Borrowers pay an average bi-weekly fee of $ 55 and the loan must be repaid based on your salary.
If you can’t pay off the loan at the end of the two weeks, payday lenders will usually convert it to a new loan. As a result, the average payday loan borrower is in debt for five months of the year. Repeated loan renewals could result in annual interest rates of over 300%. Compare that to a typical 15% credit card interest rate.
“When someone takes out a payday loan, most of the time they’re not in the best financial position to begin with,” says Matthew Divine, managing partner of Realpdlhelp.com, which provides debt consolidation services. payday loan. “Sometimes people are just naive and someone offers $ 500, and they’ve never had a loan before. Sometimes people do it just because they need the money or think they need it. “
Divine’s business works with borrowers who are struggling to repay multiple loans. “We organize the debt for them… then we send a letter to the lender and tell them that all communications should reach us. “
The debt consolidator then attempts to stop further debits and collection attempts from the payday lenders. “We will dispute payments, that’s a big part of the service we provide… once we dispute payments with the [borrower’s] bank, the bank will not allow this to continue, ”says Divine.
Due to the high fees, some young people seek alternatives to traditional payday loans when they need quick cash. Flint Yu, 18, a senior at Hightower High School in Houston, avoids using payday lenders to get advances on his paychecks, which he says he needs to transact on his brokerage account. “I would like to try to avoid them because I heard that these interest rates are crazy,” he notes.
Instead, Yu uses Activehours, a free app that links to timesheets from his part-time Marketing and SEO job for Suprex Learning. They can borrow up to $ 100 per pay period, but some users can borrow more. Like payday loans, the app debits money from the borrower’s checking account on payday.
“I started at 17 with Activehours. It’s a bit like a payday loan. We use a clock called Tsheets, and [the app] connects to Tsheets so they know how many hours we are working, ”Yu explains.“ It’s free, there is no charge, but every time you cash out it gives you the option to pay tips, that’s how they make money. ” Yu says he sometimes pays a tip, but not always.
According to the Activehours website, “We want to inspire people to treat each other fairly and to do more good. Therefore, when you use Activehours, we let you choose how much to pay for the service. We rely on our community of users to support the work we do.
Yu recommends that other young people looking to manage their money “try to use free services as much as possible instead of paying services.”
Some financial experts are wondering if services like Activehours will give payday lenders a run for their money. Payday lenders require borrowers to earn income from work, but little is done to ensure that they can afford to repay the loans.
What Fits Your Needs?
The Consumer Financial Protection Bureau (CFPB) recently proposed a rule that would require lenders to assess whether borrowers can actually afford payday loans. The rule also wants to limit the number of rollovers that borrowers can make. (Currently, 38 states have laws regulating payday lending, but the CFPB’s proposal calls for nationwide oversight.)
“You see a lot of payday loans in the south, in areas where there is manufacturing, where people work shifts or seasonal jobs, and they have limited financial services… maybe not a lot of banks. If your job or income is not stable even in 35 or 40 days, you may not be able to repay the loan, ”says Joann Needleman, CFPB Consumer Advisory Council (CAB) member and leader of Clark Hill’s Consumer. Financial Services Regulation and Compliance Group.
Needleman says concerns about inconsistencies in payday loan policies and the ability of borrowers to repay loans need to be addressed. But she points out that some data shows that the rules proposed by the CFPB would wipe out 50 to 80 percent of payday lenders because it would no longer be profitable for them to stay in business.
“Yes, it’s important to protect consumers from loans they shouldn’t have or can’t afford to pay off, I totally understand,” Needleman says. “But at the same time, this is a group of consumers – 30 to 40 million underbanked or unbanked people – who don’t have access to credit, and you are preventing them from using credit and dying. ‘have access to credit. “
For teens entering the world of work for the first time, it is important that they are educated about the variety of financial products that can help – or hinder – them when making decisions about managing their money. .
“What are the terms, what are the late fees?” I wouldn’t say just go take out a payday loan. My advice would be if you consider it, do your research and find the best product that suits your needs, ”said Needleman. “They have to understand how to properly manage these loans… it’s really an understanding of your budget and the money coming in and going out. “
So much has been written about the “predatory” nature of payday loans that it is often easy to fire the companies that offer these loans. Who are they? Are they legitimate? Consider the Argus Leader article (which can be found under the Related Links tab) that came out after South Dakota’s vote on Election Day. Are All Predatory Lenders Bad? Are they running viable businesses? Why or why not?
Joann Needleman says of payday loan users that “this is a group of consumers – 30 million to 40 million underbanked or unbanked people – who do not have access to credit.” By removing the option of the payday loan, she adds, “you are preventing them from using credit and having access to credit.” The payday loan argument has two sides. What are the advantages and disadvantages of payday loans? Does it make sense to ban them altogether, as some states have already done? Come up with several questions to research and explore, and resolve them in a mock debate.
Storytelling is a powerful way to learn from the experiences of others. Do you know someone who has taken out a personal loan? Please share your story with a partner and post it in the comments section of this article to continue the conversation.