Do you know that a major financial issue that plagues women of color is the fact that they are intentionally targeted by payday loan lenders?
Have you ever wondered why payday lenders are mostly found in neighborhoods with vacant shopping centers and boarded up businesses?
These payday loan lenders disguise themselves as financial rescue superheroes, when in fact they are targeting communities of color.
They position themselves in economically distressed communities targeting people with lower income, immigrants, and single mothers. In turn, exacerbating a cycle of debt.
This is a serious issue contributing to the racial wealth gap impacting so many women of color across the country.
However, before we delve into this issue, let's first discuss what payday loans are.
What are payday loans?
Simply, payday loans are incredibly costly cash advances or loans that must be repaid in full, on the borrower’s next payday. No additional finance charges are due if the balance is paid in full. Unfortunately, most of them are not.
These short-term loans are designed for people struggling to make ends meet, and who need cash quickly. Borrowers turn to payday loan lenders when they don’t have access to credit cards or bank loans.
Unfortunately, cash-strapped consumers of payday loans run the risk of defaulting and incurring extremely high-interest rates. Most payday loans have triple-digit interest rates. We are talking about 200% - 500% APR!
According to a Pew Charitable Trust study, twelve million Americans take out payday loans each year costing a whopping $9 billion in loan fees.
The issue is, most people simply can’t afford to pay back the loans when they’re due. A one-month payday loan or cash advance of $500 can have a finance charge of $147.95 with an APR of 360%! In the PEW study, the average payday loan was $300 but lasted five months. Borrowers paid $459 in fees on those loans.
The Consumer Financial Protection Bureau estimates that 20% of payday loans end up in default.
The Truth in Lending Act requires the lender to disclose the cost of a payday loan before the borrower enters into a loan agreement but these terms are often complicated and misunderstood.
As a result, the true cost of payday loans isn’t always easy to understand.
Payday loan lenders prey on communities of color, primarily women
Communities of color, particularly, Black communities have historically been disadvantaged by unfair lending practices.
These economically vulnerable communities are targeted because they may not have access to regular banking services. They are also are often misinformed about the terms and conditions of payday loans. In these communities, women make up roughly 60% of all payday loan customers.
Advertised as a way to help the struggling pay the bills, payday loans are nothing more than predatory lending. Lenders don’t verify that you can afford the loan, only that you have a bank account and job.
A typical borrower has one or more of the following characteristics: young age, has children, does not own a home, no access to any other type of credit.
In a financial emergency, people will cope in a variety of ways including paying bills late, exhausting their savings accounts, borrowing from friends and family. But the problem arises when someone has exhausted all possible alternatives.
Payday loan lenders offer a quick and easy solution for those most desperate for cash. But with annual interest rates of 300% or higher what seems at first to be a heaven-sent can quickly turn into a nightmare.
The gender wage gap affects the ability of women of color to pay back loans
Gender and race affect the ability of women of color to earn fair wages. Overall women employed full time are paid 82 cents for every dollar paid to men. That is about 20% less on average.
However, the numbers are worse for women of color. Black women are paid 61 cents for every $1 their white male counterparts earn. The wage gap for Latina workers is 54 cents.
Women of color particularly, Black and Latina women, are more likely to be a family’s sole breadwinner than a white woman. And black mothers are by far the most likely to be the primary economic support for their families. This means they need more money to support themselves and their families but they are grossly underpaid.
Women who underearn and are living paycheck to paycheck are always on the verge of catastrophe if an unexpected expense arises.
And these lower incomes in turn affect the ability to build credit, get out of debt, and break the cycle of poverty.
The importance of financial literacy for women of color
In a recent study published by TIAA Institute titled “Financial Literacy and Wellness among African Americans” found that African Americans struggle with low levels of financial literacy.
The financial literacy gap exists in African Americans regardless of gender, age, income level, or degree of education.
However, the TIAA reports that financial literacy is higher among men. There is a seven percentage point difference between African-American men and women. This difference holds true even after accounting for other socio-economic factors.
Another recent study by the Consumer Financial Financial Protection Bureau reveals that only 44% of Black households own a home compared to 75% of white households.
The measure disproportionately hurting Black mortgage borrowers: credit score and debt-to-income ratios. And defaulting on a payday loan can be incredibly impactful to one's credit.
Understanding the importance of having a healthy credit history amongst other key factors like the advantages of black homeownership is important to closing the wealth gap.
The cycle of poverty won’t disappear simply by educating the disadvantaged however financial literacy can be the key to slowing the cycle.
Financial literacy is key for women of color to gain financial wellness and security. This is why we offer completely free financial literacy courses to help women of color succeed.
Alternatives that can help women of color instead of payday loans
Women of color who turn to payday loans often don’t understand they may have alternatives. For instance:
- Asking their employer for an advance paycheck
- Selling clothes, household goods, and other items for quick cash
- Researching nonprofits that make small-dollar loans with better loan terms
- Using a credit card
It's important to recognize that credit cards are not an alternative to having an emergency fund. However, even the highest credit card interest will be less than the triple-digit interest rates that payday loans offer for a short term loan.
Lending circles are common among women of color. Often these lending circles also known as a Tanda, Sociedad, or Susu can help to save for a goal but unfortunately may not be available when needed the most.
What States can do to help consumers
In an attempt to prevent borrowers from becoming trapped in a cycle of debt, 16 states and the District of Columbia have banned payday loans and protect consumers from high-cost short term loans through rate caps.
In addition, the protections the National Consumer Law Center has proposed some key suggestions to help states protect consumers from high-cost loans. For instance, they suggest:
- Cap rates for small loans at 36%, and lower for larger loans, as many states do.
- Including all fees and charges in the rate cap for both closed-end and open-end credit.
- Ensuring that the state deceptive practices law covers credit and bans unfair, abusive, or deceptive practices.
- Banning or capping fees and requiring that any fees be refunded pro-rata if a loan is refinanced.
Unfortunately, in 2020, the FDIC announced plans to repeal two key policies. These policies help protect the most economically vulnerable consumers against high-cost bank payday loans above 36%. Although many states have adopted a 36% annual interest rate cap many have not.
Opponents to the interest cap argue that these policies would eliminate much-needed loans to underserved communities. I’d argue that the policies protect vulnerable communities from predatory lending while fulfilling a need.
What banks can do to help consumers
Banks have been reluctant to make small short-term loans available to those with bad or no credit history. Restricting access doesn’t solve the underlying issue of low-income wages but instead gives way to a ridiculously expensive safety net; payday loans.
Providing access to cash advances or personal loans to those who don’t have the luxury of a bank or credit card is necessary. And banks shouldn’t financially debilitate those who need help the most.
Capping interest rates is one small way to protect women of color from predatory lending practices. Fair wages, financial literacy, and fair lending practices are some of the other key ways.
It, however, takes broader effort on all levels to effectively lobby for and implement these measures. From government to banking to communities and to individuals.
As individuals and women of color, we can play out part by promoting financial education and financial literacy within our families and in our broader communities.