American voters have spoken – and not just for the next president. They also support cracking down on what some see as predatory lending, especially in the form of payday loans. In the November election, South Dakotans voted to cap interest rates on short-term loans at 35%. With this 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 paycheck. This option comes at a high price, however, because the interest rates associated with these loans – partly 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 been criticized for their treatment of low-income borrowers. These borrowers may need extra cash to meet their monthly expenses, but at the same time they are unable to repay the payday loans on time, putting them further and further into debt with payday lenders.
How it 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 brick-and-mortar and online businesses, giving customers round-the-clock options for accessing 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 should rush into using this type of loan without understanding the financial ramifications. In September 2015, a British teenager made headlines when he took his own life after 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 loan 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 have borrowed money this way. When they do, they can hurt their financial future by getting trapped in a cycle of debt because they don’t understand how these loans work or underestimate their ability to repay them.
Payday loan amounts typically range from $100 to $500, with the average loan around $375, according to Pew Charitable Trusts. Borrowers pay an average fee of $55 per two weeks, and the loan must be repaid according to your salary.
If you can’t repay the loan at the end of the two weeks, payday lenders will usually turn it into a new loan. As a result, the average payday loan borrower is in debt for five months of the year. Repeated renewal of loans could lead to annual interest rates of over 300%. Compare that to a typical credit card interest rate of 15%.
“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 at Realpdlhelp.com, which provides debt consolidation services from payday loan. “Sometimes people are just naive and someone offers $500, and they’ve never had a loan before. Sometimes people just do it 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 must come through to us.”
The debt consolidator then works 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,” Divine said.
Due to high fees, some young people are looking for alternatives to traditional payday loans when they need money fast. 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 in his brokerage account. “I’d like to try to avoid those because I’ve heard those interest rates are crazy,” he notes.
Instead, Yu uses Activehours, a free app that links to timesheets from her part-time marketing and SEO job for Suprex Learning. It 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 when I was 17 with Activehours. It’s kind of like a payday loan. We use a clock called Tsheets, and [the app] connects to Tsheets to find out how many hours we work,” says Yu. 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 do more good. That’s why 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 other young people looking to manage their money “to try to use free services as much as possible instead of using paid services.”
Some financial experts wonder if services like Activehours will give payday lenders a run for their money. Payday lenders require borrowers to have employment income, but little is done to ensure 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 borrowers can make. (Currently, 38 states have laws regulating payday loans, but the CFPB 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 have seasonal jobs, and they have limited financial services … maybe not a lot of banks . If your job or income isn’t stable, even in 35 or 40 days, you may not be able to repay the loan,” says Joann Needleman, who sits on the CFPB’s Consumer Advisory Board (CAB) and leads the Consumer Advisory Board of Clark Hill. Financial Services Regulation and Compliance Group.
Needleman says concerns about inconsistencies in payday loan policies and borrowers’ ability to repay loans need to be addressed. But she points out that there is data showing that the rules proposed by the CFPB would eliminate 50% to 80% of payday lenders because it would no longer be profitable for them to stay in business.
“Yes, it’s important to protect consumers against loans they shouldn’t take or can’t afford to repay, I totally understand,” Needleman says. “But at the same time, it’s a group of consumers – 30 million to 40 million people who are underbanked or unbanked – who don’t have access to credit, and you’re preventing them from using credit and d ‘have access to credit’.
For teens entering the world of work for the first time, it’s important to familiarize themselves with the variety of financial products that can help them – or hinder them – when making decisions about managing their money. .
“What are the conditions, what are the late fees? I wouldn’t say just go get a payday loan. My advice would be if you consider it, do some research and find the best product that meets your needs,” Needleman said. “They need to understand how to handle these loans properly…it’s really about understanding your budget and the money coming in and going out. »
So much is written about the “predatory” nature of payday loans that it is often easy to dismiss the companies that provide these loans. Who are they? Are they legit? Consider the Argus Leader article (found in the Related Links tab) that came out after the South Dakota 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 – 30-40 million underbanked or unbanked people – who don’t have access to credit.” By removing the payday loan option, she adds, “you’re preventing them from using credit and getting access to credit.” The payday loan argument has two sides. What are the advantages and disadvantages of personal 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 address 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.