Did you know that a major financial issue plagues women of color? They're intentionally targeted by payday loan lenders.
Have you ever wondered about payday lenders? Why they're often in neighborhoods with vacant shopping centers and boarded-up businesses?
These payday loan lenders pretend to be superheroes. When in fact, they're targeting communities of color.
They set up in communities with financial strain. Then they start targeting people with low incomes.
In addition, they target immigrants and single mothers. It makes the cycle of debt worse.
Payday lenders are a big issue contributing to the racial wealth gap. And it impacts so many women of color across the country.
But before we delve into this, let's discuss what payday loans are.
What is a payday loan?
Simply, payday loans are costly cash advances or loans. They must be repaid in full by the borrower’s next payday.
To get a loan like this, you'll be asked some questions. Your social security number, I.D., a bank account, and a job are asked about. There's not usually a credit check involved.
And online lenders are selling online loans that make it even easier to lend. No more charges are due if the balance is paid in full. Unfortunately, most of them are not.
How payday loans hurt borrowers
These short-term loans are designed for people burdened with credit difficulties. They have expenses and need cash quickly. Borrowers might turn to payday lending when they have no access to credit cards or bank loans.
Unfortunately, cash-strapped consumers of fast payday loans may default. If they do, they incur high-interest rates.
Most payday loans have triple-digit interest rates. So we're talking about 200% - 500% APR!
A Pew Charitable Trust study found that twelve million Americans take out payday loans each year. But most people can’t afford to pay back this type of loan when it's due.
In the PEW study, the average payday loan was $375. Borrowers paid $520 in interest.
The Consumer Financial Protection Bureau estimates that 20% of payday loans end up in default.
The Truth in Lending Act requires the lender to tell the cost of a payday loan before the borrower agrees. But these terms are often complicated. As a result, the true cost of same day payday loans isn’t always easy to understand.
Instant payday loan lenders prey on communities of color, primarily women
Communities of color, particularly Black communities, are historically disadvantaged by unfair lending practices.
These communities are targeted because they may not have access to regular banking services. In addition, they are misinformed about the terms and conditions of fast payday loans.
Advertised as a way to help people pay bills, same day payday loans are nothing more than predatory lending. Lenders don’t check 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. They are young, have children, don't own a home, and have no access to credit.
In a financial emergency, people will cope in many ways. These include paying bills late, using savings until they're gone, and borrowing from friends and family. But the problem arises when someone has used all possible alternatives.
So instant payday loans lenders offer a quick solution when you need cash. But with annual interest rates of up to 400% in some cases! Meaning that what seems good can quickly turn bad.
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. It is one of the financial statistics that severely impacts women.
Overall women are paid 83% of what men make. 17% less on average!
Women of color, particularly Black and Latina women, are more likely to be a family’s sole breadwinner than white women. And black mothers are most likely to be the primary economic support for their families.
Which means they need more money to support their families. However, they are grossly underpaid.
So women who underearn and are living paycheck to paycheck are always on the verge of catastrophe with unexpected costs. Which may lead to getting same day payday loans.
So this affects their ability to build credit, get out of debt, and break the cycle of poverty.
The importance of financial literacy for women of color
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 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. The difference holds true even after accounting for other socio-economic factors.
Credit scores and homeownership
Only 43.4% of Black households own a home compared to 72.1% of white households.
The measure disproportionately hurts Black mortgage borrowers' credit scores. Plus their debt-to-income ratios. And defaulting on a payday loan can impact one's credit.
Knowing the benefit of healthy credit and the advantages of black homeownership matters. It can help close the wealth gap.
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. It's why we offer completely free financial literacy courses to help women of color succeed.
What to do if you got a payday loan and can't pay it back
Maybe you had some short-term financial needs and took out a payday loan. Perhaps a loan was your only option and now you're having trouble paying it back.
Instant payday loans are not a long-term financial solution. So here's what to do if you're struggling to pay back the money.
- With your next paycheck, pay expenses first. Put the rest of the money towards your loan.
- Consider credit counseling or financial services to help you make a plan.
- Ask about an extended repayment plan.
- Consult the consumer financial protection bureau website.
- Refer to the Department of Financial Protection if you believe you've been the victim of a scam.
Paying back a loan with high-interest rates like this can be tough. But you aren't alone and there are ways through it.
Payday loan alternative options that can help women of color
Women of color who turn to same day payday loans often don’t understand they may have a payday loan alternative. 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.
- Thinking about a loan from a credit union for a long-term solution.
- Using a credit card.
It's important to recognize that credit cards are not an alternative to 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. Unfortunately, they may not be available when needed most.
What States can do to help consumers
To prevent borrowers from becoming trapped in a debt cycle, 16 states and the District of Columbia have banned payday loans. And they protect consumers from high-cost short-term loans through rate caps.
In addition to these protections, the National Consumer Law Center has proposed some key suggestions. And these will 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."
- "Include 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."
- "Ban or cap fees and require any fees to be refunded pro-rata if a loan is refinanced."
Changes in policy
Unfortunately, in 2020, the FDIC announced plans to repeal two key policies. These policies help protect the most 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 are reluctant to make small short-term loans available to those with bad or no credit history. Even though this could be a good payday loan alternative.
But restricting access doesn’t solve the issue of low-income wages. Instead, it gives way to an expensive safety net: instant 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. In addition, banks shouldn’t financially debilitate those who need help the most.
Help is needed from everyone to stop payday loans unfair practices
Capping interest rates is one way to protect women of color from the predatory lending practices of fast payday loans. Fair wages, financial literacy, and fair lending practices are some of the others.
However, it takes more effort on all levels to lobby for and implement these measures. From government to banking to communities.
As individuals and women of color, we can play our part by promoting financial education within our families and our communities. And these free financial courses can help you learn about money and achieve your goals.