By Patricia Jones, Task Force on Poverty
If you have picked up your ballot, you’ve noticed Initiative 428: a call to amend Nebraska law to restrict delayed deposit services licensees, generally called payday lenders. Payday loans are generally considered to be abusive of people who live in poverty. But sometimes they allow people with no other access to funds to pay their bills.
Payday loans are very high-rate loans to high-risk individuals, so called because these are short term loans supposedly designed to last only until the borrower gets their next paycheck and repays the money. Most loans are for 30 days or less and help borrowers pay bills that cannot be delayed. These loan amounts are usually from $100 to $1,500.
When someone applies for a payday loan, they will have to provide pay stubs from their current employer. The lender will also pull their credit history and credit score, just as a bank or credit union would. But a bank or credit union is limited by usury laws regarding the amount of interest they can charge. Payday lenders don’t have this restriction. Because their borrowers are high-risk, they can charge high fees and interest rates.
Payday loans generally charge a percentage or dollar amount per $100 borrowed. A fee of $15 per $100 is common. This equates to an annual percentage rate of almost 400% for a two-week loan. So, for example, if you need to borrow $300 before your next payday, it would cost you $345 to pay it back.
If you are unable to pay when your loan is due, the payday lender may allow you to pay only the fees due and then the lender extends the due date of your loan. You will then be charged another fee and still owe the entire original balance. Using the above example, if you pay a renewal or rollover fee of $45 you would still owe the original $300 loan and another $45 fee when the extension is over. That’s a $90 charge for borrowing $300 for just four weeks. In addition, if you don’t repay the loan on time, the lender might charge a late fee. (Example is from the Consumer Financial Protection Bureau)
Instead of paying back the loan in full, consumers find themselves scrambling to manage the loan repayment and other bills. Three-fourths of all payday loans are made by borrowers who have taken out eleven or more loans in a year, and most of them are taken out within two weeks of repaying a previous one. A cycle then begins, and what started as a $300 short-term loan can balloon into amounts impossible to be paid back.
If loan funds are loaded onto a prepaid debit card, there might be other fees. There could be fees to add the money to the card, fees for checking the balance or calling customer service, fees each time the card is used, and/or regular monthly fees.
That sounds like predatory lending. But for millions of Americans, payday loans remain the only way to get credit. In 2017, the Federal Deposit Insurance Corporation (FDIC) estimated a quarter of U.S. households did not hold accounts at a bank or credit union. In 2019, the Federal Reserve found that half of U.S households did not have sufficient funds to pay for a $400 emergency. These consumers are more often low-income or unemployed, and minorities account for a large portion of the unbanked population. Millions of Americans don’t have access to other forms of short term loans when they need them—they can’t just put unexpected expenses on the credit card, or tap into a bank line of credit. So payday loans were developed to serve consumers in need.
Payday lenders are counting on people to not read their credit agreement! Be sure to read the loan contract carefully to spot all of the fees and costs before signing for the loan. Better yet, go to a bank or credit union. They charge interest rates that are higher for people with bad or no credit, but those are capped by law, and are certainly lower than what would be charged by a payday lender.
How you vote on Initiative 428 is up to you. Where you borrow money is also up to you. But please be aware of the pitfalls of payday loans.