Predatory lenders make money from rising gas and food prices

Most want to avoid payday loans, which offer quick cash against future paychecks without a credit check and come with an interest rate of over 500%. But the rapid increase in food, fuel and rent prices gives them few options.

To predatory payday lenders, HoweverAnd the They indicate happy days and happy times.

David Fisher, CEO of short-term mortgage lender Innova (above) He said during an earnings call in May. The company beat earnings estimates for the quarter by 7.7%.

Given the economic dynamics in place, Fisher said his company has “purposefully driven demand through our marketing efforts,” and has spent more to attract new customers. This has paid off. He said about 44% of all loans were issued to new customers in the last quarter.

This increase in borrowers for the first time came as consumer inflation in the United States reached its highest level in more than four decades, and Americans struggled to put food on their tables and gas in their cupboards.

Work to drive to work

The national average for a gallon of gas is less than $5, up 61% from last year. The leap comes just as many employers are asking workers to return to personal work. Meanwhile, the federal minimum wage remains at $7.25 an hour, where it has been since 2009. Low-wage workers must work approximately 14 hours to fill their tank.
About two-thirds of Americans now live paycheck to paycheck, according to a June LendingClub poll. That number jumps to 82% among workers making less than $50,000.
The average credit score of low-income earners in the United States is also dropping, according to LendingClub data. About 40% of Americans who earn less than $50,000 and a living paycheck paycheck have a credit score of less than 650, making it difficult for them to get a loan through a traditional lending institution or qualify for more. credit. The average credit score in the United States is 714, according to Experian.

For those Americans, higher interest payday loans are still easy to come by. These small dollar loans, usually between $100 and $1000, Available in over half of US states with little regulation. Proof of income and a bank account is all most borrowers need to come up with cash on hand.

Alex Horowitz, principal officer of Pew’s Consumer Finance Project, said current data that tracks the number of payday loans has not yet been released, but based on past trends, there is likely to be an increase in borrowing. “Survey data shows that about 70% of payday loan borrowers use the loan primarily for routine expenses and to deal with increased or fluctuating expenses.”

debt trap

These loans are often incredibly expensive but the borrowers either lack the financial knowledge to look for alternatives or don’t think they have any other choice. There is currently no federal cap on maximum interest rates for small dollar loans. Not all states allow this, and it is up to those states to decide whether to implement their own caps.

In the 32 US states that allow payday lending, average annual interest rates range from 200% in Minnesota to 664% in Texas.
Borrowers are often unable to repay the full loan amount when due, usually within two to four weeks, which leads them to take out a second loan with additional fees. This creates a cycle of debt that is difficult to break. Nearly 1 in 4 payday loan recipients take additional loans Nine or more times, the Consumer Financial Protection Bureau found.
Studies show that black and Latino communities are disproportionately targeted by high-cost loan providers. In Michigan, where the average interest rate on payday loans is 370%, there are 7.6 payday stores per 100,000 people in areas with more than a quarter of black and Latino populations. That’s about 50% more than other regions, according to data provided by the Center for Responsible Lending.

Companies that provide high-cost loans say they are doing a much-needed service to low-income communities by issuing loans to Americans that traditional banks refuse to serve. They claim that higher interest rates are necessary because of the higher risk of default. But the consumer Advocates say this is a false narrative.

Horowitz said that seven large US banks, including Bank of America, Wells Fargo and Truist, have created programs that offer micro-dollar borrowing options with low annual interest rates. They plan to look at banking history — not credit scores — to determine who qualifies for loans.

“There are 18 states and the District of Columbia that have banned payday loans and have held off just fine without predatory lending products,” said Nadine Chabrier, senior policy advisor at the Center for Responsible Lending. “There are fair and responsible lending products with low interest rates and fees available that people can use.”

Soon after the Covid-19 pandemic hit the US, the Consumer Financial Protection Bureau scrapped key parts of a 2017 rule that required lenders to assess consumers’ ability to repay loans. They said this rule would have wiped out a lot of the money they earn from borrowers who defaulted on their loans. By scrapping parts of the rule, the CFPB said it would ensure “the continued availability of micro-dollar lending products to consumers who demand them.”

In a blog post, former CFPB director Dave Oigo expressed concern about the rule changes, saying he has problems with “any lender’s business model that relies on consumers not being able to repay their loans.”

Buy Now Pay Later

Advocates also worry about new forms of lending that have emerged in recent years that have generally been much less regulated than payday lending.

Buy Now, Pay Later (BNPL) firms have seen their total market share grow between 200% and 350% over the past two years, according to the Center for Responsible Lending. Now, companies like Klarna and Zip are partnering with Chevron and Texaco to let Americans fill their tanks now and pay in installments over six weeks.

BNPL’s clients tend to be millennials and Generation Z and two-thirds of applicants are mortgage borrowers, according to research by Marshall Lux, a research fellow at Harvard Kennedy School.

These companies do not classify themselves as a lender. BNPL is not a creditor but a debit, with payments made automatically from customers’ bank accounts and without interest or fees.

In California, 91% of consumer loans offered in 2020 were BNPL loans, and 24% of financially vulnerable BNPL recipients reported having difficulty making payments.

BNPL lenders are not required by law to determine a borrower’s ability to repay loans. There are no regulations on disclosing fees for late payments, account reactivation, or declined payments.

“If people are using a credit product like this for their basic needs, I am concerned,” Chabrier said. She is concerned that BNPL clients are able to open files Loans at once, they may lose track or have difficulty paying them all.

“Many people use buy now and pay later to stack their purchases through multiple sellers,” Chabrier said. “Because of the lack of underwriting and considering whether or not they can pay for these items, it really becomes unreasonable for them.”

Klarna sets a late fee limit at 25% of the purchase amount, which is a far cry from the 400% interest rates that lenders charge on payday, but Chabrier sees this as a less risky proposition for a larger problem.

“They continue to extract money from low-income people,” she said. “If people have less purchasing power with their wages, it will only get worse.”

Back in Mississippi, which has the highest poverty rate in the country, Jones struggled to keep distressed callers out of the hands of loan sharks and into financial literacy programs sponsored by local banks. But she said it’s hard to work against so many payday lenders with huge advertising budgets. The state has the highest concentration of per capita payday lenders in the state, most of them in low-income areas or in communities of color.

Jones said that payday lenders are so prevalent in Mississippi, that they outnumber McDonald’s restaurants by more than 5 to 1.

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