Why payday loan use is on the rise during the pandemic and how you can avoid it
Payday lenders targeting low-income people are nothing new. Short-term, high-interest loans which are often intended for minorities in rural areas, have the potential to create a spiral of debt from which many find it difficult to break free.
In 2018, for example, more than 33,000 payday loans were taken out each week in Alabama, according to Alabama Appleseed, a Montgomery-based social justice advocacy group. This represents 1.7 million loans per year, generating more than $100 million in fees. The situation is similar in the rest of the South. In South Carolina, nearly 700,000 loans were taken out in 2018 by 86,000 different borrowers.
the Consumer Finance Bureau found that 1 in 4 payday loans are borrowed nine times and borrowers take five months to repay loans, resulting in an average of $520 in finance charges per client.
And this trend has only gotten worse during the pandemic. Amid levels of unemployment not seen since the Great Depression, regular use of payday loans tripled while people with few other banking options scrambled to cover basic needs, such as food utilities and rent, according to Gusto, a national human resources company.
Loans have historically and disproportionately targeted low-income workers, people of color and women, according to a Pew study. The problem is exacerbated by the lack of traditional financial institutions for African Americans neighborhoods, where people have among the lowest credit scores, highest debt collection rates and highest subprime credit ratesand the use of high-cost payday loans and other alternative financial services (AFS) loans.
Currently, few Southern states offer protections for people taking out loans, and the interest charged is among the highest in the country. Lenders in Texas can charge up to 664%, the highest rate nationally, while similar companies in Florida charge 304%the lowest of the southern states.
Georgia, Arkansas, and North Carolina do not allow payday loans, but do allow title loans and small consumer loans under certain conditions.
And despite high interest rates and increased business over the past year, payday loan companies have taken $500 million in federal pandemic assistance.
While low-income people may feel trapped by their situation and the lack of traditional financial institutions, there are alternatives to borrowing from a payday lender.
Consider researching local charities and nonprofits to help you get things like groceries or gas. Or maybe you just need help with a bus ticket to get to a job interview. You can use this link to search for a charity or nonprofit based on your needs.
If you’re willing to wait a few days for a decision on a traditional loan, credit unions can be a helpful low-cost alternative. Some credit unions even offer products similar to payday loans. These have higher interest rates than regular loans, but are much cheaper than the predatory high-interest alternative. You can search for credit unions here.
Loans for bad credit are also a much better option and the financial institution may allow you to repay the loan over several years. You can also pre-qualify without hurting your credit score and you may be able to deposit the money into your account within hours. Here is a list of current bad credit loan providers.
If you have an eligible car, consider Uber or Lyft. You can also join one of the many grocery services, where you shop and deliver groceries to customers for pay and tips. Instacart and Shipt are among the most popular services. Also, some thrift stores will pay you cash for unwanted clothes and shoes.
A Lending Circle may not meet your short-term needs, but can be a good choice as long as you are also willing to help people financially when they need it. Usually circles are formed with trusted people and can work in different ways. Some lending circles raise funds for one person each month, helping pay for an unexpected expense. Others require everyone to contribute a percentage of their salary each month which is then placed in a fund. The fund can be used as needed by members. Lending Circles can also help build credit when done through a financial services website. Visit Mission Asset Fund for moD on how circles work.
Medical debt can be costly and overwhelming. Most doctors’ offices and hospitals are willing to structure a payment plan, and some even offer credit cards with interest-free promotional periods. This gives you time to repay the money. Finding a medical bill advocate could also help cut costs. They typically help negotiate bills and spot costly mistakes.