What looks like an easy solution for an emergency need often puts people into an endless cycle of debt.
Four people who were in debt were arrested in northern Utah recently and spent between a few hours to a couple of days in jail. Although the U.S. abolished debtors’ prison almost two centuries ago, all four were arrested basically because of the debts they had.
It turns out that each of the four had borrowed money at high interest rates from a business called Loans for Less and were sued for owing sums that ranged from $800 to $3,600, according to ProPublica. When they missed a court date, the company obtained a warrant for their arrest.
The arrests are the latest incidents to shed light on the problem of payday loans and title loans. They are arrangements in which people can get quick, short-term loans, but they carry great risk and the interest rates are high.
“Although the loans are sold as two-week products for emergency expenses, many borrowers use them to cover regular expenses,” says the St. Vincent de Paul Society for the Diocesan Council of Austin. “If the loan is not paid off at the end of the term, the loan is then ‘rolled over.’ A new loan is originated for the outstanding debt, and assessed new origination and compounding finance charges. On average, borrowers end up indebted for five months of the year on their original two week loan. Origination fees and finance charges plus interest add up to an average APR of 500%.”
People usually go for a payday or title loan (in which one’s car title is used for collateral) when they find themselves in a financial bind. Often, they end up in worse financial shape than before.
“Technically, debtors are arrested for not responding to a court summons requested by the creditor. But for many low-income people, who are not familiar with court proceedings, lack access to transportation, child care options or time off, or move frequently and thus may not receive notifications, it’s a distinction without a difference,” ProPublica explained.
Some 12 million Americans take out payday loans every year, according to Pew Charitable Trusts. And the Federal Reserve Board has noted that a quarter of adults in the U.S. would not be able to handle an unexpected $400 expense without borrowing or selling something to pay for it.
The ProPublica report noted that under the Obama administration, the Consumer Financial Protection Bureau began the process of regulating payday lenders. “The agency finished writing what were meant to be the final rules in 2017, after the Trump administration had taken office,” it said. “The most notable provision would require payday, vehicle title and some installment lenders to ascertain, in advance, a borrower’s ability to repay the loan without sacrificing basic living expenses like rent and food. The industry aggressively lobbied against the provision, which would have curtailed its profits, and so far it has not gone into effect. The Trump administration has delayed the payday lending rules and is considering a proposal to gut them.”
In early 2019, Catholic Charities USA and the United States Conference of Catholic Bishops joined a coalition of Christian groups to sign a letter expressing concern that rescinding the so-called “small dollar lending rule” could harm low-income borrowers, Catholic News Agency reported.
But as the lucrative payday loan industry continues to proliferate, so do new ways to help small borrowers get bridge loans without taking huge chances.
The Austin St. Vincent de Paul Society created a Predatory Loan Conversion Program to assist clients in getting out from under crushing debts. “Through the help of a cooperating credit union, we help those in need convert their high interest loans into share secured loans at a lower interest rate,” the Society said. “This program has received financial support from local Catholic Campaign for Human Development funds from the Diocese of Austin, the Texas Financial Education Endowment, and the Texas Bar Foundation.”
Catholic Charities of Northern Kansas sponsors the Kansas Loan Pool Project, which helps individuals alleviate high-interest payday and title loan debt. It offers legitimate loans through a partnership with Sunflower Bank at fair interest rates, allowing them to pay off payday and title loans. Catholic Charities of Northern Kansas, the project’s sponsor, says it has long been aware of “how many of our clients have become trapped in the debt cycle of these predatory products with exorbitant interest rates.”
“Most people who go to a predatory lender go to pay a necessity such as rent, mortgage, a car payment or to repair a vehicle so they can continue to work,” Claudette Humphrey, Director of Stabilization Services at Catholic Charities, told The Register of the Catholic Diocese of Salina.
She said payday or title loans are marketed as a one time ‘quick fix’ for people facing a cash crunch. When the client cannot pay the loan back, they ‘re-loan’ with an additional service fee. Payday loans are balloon notes, with up to 391 percent APR. Title loans are secured with the vehicle’s title, with an average interest rate of 260 percent.
The Kansas Loan Pool Project offers monthly coaching on things like budgeting and help with predatory debt relief. Many clients have never used budgeting before, and when they learn it, they realize in what areas they can make cuts or economize.
Another alternative is an app called PayActiv, which helps companies get their workers emergency cash for very small fees. It works on the idea that workers have usually already earned the cash they need for emergencies because they have worked far enough into the pay period. They just haven’t been paid yet.
“And so we said the problem is really a between-paychecks problem,” Safwan Shah, the founder and CEO of PayActiv, told National Public Radio. Walmart is one company that has partnered with PayActiv.
“So let’s say they’ve already earned $900” by earning $100 a day for nine days, says Shah. But payroll is still five days away and they need the money right away. Shaw says they open the app and “they will see a number which is half of the amount they have earned that is accessible to them.”
In some cases, churches are offering small-dollar loans to members and the community as an alternative, Religion New Service reported. Friendship-West Baptist Church in Dallas operates Faith Cooperative Federal Credit Union, which offers checking and savings accounts as well as auto, mortgage and personal loans. Among the personal loans are small-dollar loans designed to replace those offered by payday lenders, said Frederick Douglass Haynes III, pastor.
Interest rates on the small-dollar loans range from 15 percent to 19 percent, depending on a borrower’s credit standing, he said. While higher than, say, a home equity credit line, the rates are a fraction of those charged by the money stores.
And La Salle Street Church in Chicago has dedicated $100,000 to a fund for small-dollar loans. So far, the group has made nine such loans and wants to expand its work, senior pastor Laura Truax told RNS.