Each day, in cities across America, people go to payday loan companies, seeking a temporary escape from their financial problems. But that quick fix comes with a hefty pricetag attached--interest rates that can run 400 percent or more on a two-week loan. The fees on such loans, in fact, can become so huge that they rival monthly rent bills.
Supporters of the payday loan industry say that such shops are simply providing a public service, and that there's great demand for emergency loans in today's economy. They also point out that borrowers are not coerced into obtaining loans, that people apply for the money knowing the costs involved.
However, there's a growing body of evidence to suggest that payday loan companies target the working poor, minorities, and military families. In other words, these lenders are accused of preying upon some of the most vulnerable members of society, the kind of people who don't have a financial safety net to fall back on.
For instance, the head of the consumer protection group known as WashPIRG in Washington state has stated that the aim of the industry is to take advantage of a certain group of targeted people. WashPIRG further states that payday loan guidelines can be confusing, causing borrowers to become caught in a web of debt. Moreover, payday loan operations are often largely unregulated, since they may be exempted from state usury laws, which place limits on the amount of interest lenders can charge customers.
And payday loan outlets tend to be located in areas where they will attract the most traffic from people who may be least able to afford their services. For instance, in Washington state, more than 36 payday loan stores are situated within three miles of the Fort Lewis/McChord Air Force Base. Also, the lenders tend to locate in areas with a high percentage of black residents. Black areas might have as many as twice as many payday outlets as white neighborhoods. This is true, not only in South Seattle and other areas of Washington state, but also in Illinois and Louisiana, where payday loan operations tend to set up shop in minority and impoverished areas in Chicago and New Orleans.
As you might expect, the payday loan industry sharply denies that it targets blacks and the poor. In fact, the industry's spokespeople claim that their shops serve the middle class. For instance, one lender, Moneytree, contends that stores are positioned to be near banks and retail outlets and that demographics don't enter into the equation. And the industry points to statistics which indicate that borrowers earn, on average, $25,000 to $50,000 each year.
However, the Consumer Federation of America sharply disagrees. The consumer advocacy group maintains that payday loan stores cater to low-income people who hold jobs. While they may have a checking account and a regular paycheck, these wage-earners often have little in the way of savings. As a result, they are prime targets for emergency cash loans. And, once they become payday loan customers, they can find it difficult to break free of the debt spiral.
In their defense, representatives of the payday loan industry say that they discourage irresponsible borrowing. They also maintain that they are willing to create payment plans for those who have difficulty repaying their loans. And, in some cases, borrowers can pay back loans within a day without incurring any charges. Spokespeople for payday loan companies note that borrowers know about interest rates ahead of time and the requirements of the loan are fully disclosed.
However, there can be little argument that, once people take out a payday loan, the chances are great that they will be return customers. About 25 percent of payday loan clients used the service anywhere between 10 and 19 times a year--a statistic which emerged from a survey by Washington state's Department of Financial Institutions.
For someone who takes out a loan of $300, the fees can run as high as $60--an amount consumer activist groups label as excessive. And the problem may be growing. More than 20,000 payday loan shops operate across the nation. In some areas, borrowing for payday loans has doubled in the course of a single year. In fact, in some states, payday loans are now a billion dollar industry.
Despite the protests from payday lenders, it appears that the working poor and minorities are suffering as a result of payday loan practices. Without significant personal financial reserves, these people are easily lured into payday loan shops, with their promises of fast, convenient emergency loans. However, they can quickly find themselves mired in larger and larger mountains of debt--a cycle of borrowing which can be difficult to break. At times, the debt can be so great that borrowers contemplate bankruptcy. Therefore, payday loans can be seen as an obstacle in preventing the working poor from moving up the economic ladder.
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