“Anne Leland Clark: Payday loan debts have financially hobbled thousands of Minnesotans. Lawmakers and other elected officials must advocate for reform in lending practices, including interest rate caps” We’re thrilled to share this op-ed in the Sahan Journal by our executive director, Anne Leland Clark.
Commentary: At first, a payday loan may seem innocuous and helpful, a way to relieve the immediate pressure of piled-up bills. But soon their high interest rates ensnare the low-income people they target. Such predatory practices have their roots in racist economic and residential policies. The head of Exodus Lending, a St. Paul nonprofit, pleads for “a change in the system.”
Melissa left a difficult relationship and became a single mother. Things looked bright as she started on her own again–until financial surprises came her way.
Her son’s Social Security survivor’s benefits were cut by more than $200 a month, and much-needed therapy visits for her children added another $200 in monthly expenses. She fell behind on all her bills, including rent, and late fees started to mount.
So Melissa did something she hoped she’d never need to do. She took out a payday loan.
Payday loans from storefronts and online lenders are marketed as short-term solutions for emergency use, but the reality is quite different. Lenders typically do not do a credit check or verify a borrower’s repayment ability, so the approval odds are very high.
This process is appealing for individuals with low or no credit. Plus, the money is relatively quickly available in one’s bank account within days of approval.
Unfortunately, the interest rates on these loans are absurdly high.
Additionally, unlike other loans (student loans, for example), you don’t pay them back over time. You must pay them back all at once. To qualify, all you need is proof of income and a checking account. Then you can get a loan (typically for $500 or less).
So, for example, let’s say you borrow $375. You agree to pay a one-time fee of $55, and then you must repay the full $375 in two weeks. However, if you are like most borrowers, you cannot afford the $375 payoff, so instead, you pay the “one-time” $55 fee again to renew the loan for another two weeks. Typical payday loan borrowers fall into the renewal cycle (aka the payday loan debt trap) for about five months of the year–meaning they’d pay $550 in fees on a $375 loan.
Melissa left a difficult relationship and became a single mother. Things looked bright as she started on her own again–until financial surprises came her way.
Her son’s Social Security survivor’s benefits were cut by more than $200 a month, and much-needed therapy visits for her children added another $200 in monthly expenses. She fell behind on all her bills, including rent, and late fees started to mount.
So Melissa did something she hoped she’d never need to do. She took out a payday loan.
Payday loans from storefronts and online lenders are marketed as short-term solutions for emergency use, but the reality is quite different. Lenders typically do not do a credit check or verify a borrower’s repayment ability, so the approval odds are very high.
This process is appealing for individuals with low or no credit. Plus, the money is relatively quickly available in one’s bank account within days of approval.
Unfortunately, the interest rates on these loans are absurdly high.
Additionally, unlike other loans (student loans, for example), you don’t pay them back over time. You must pay them back all at once. To qualify, all you need is proof of income and a checking account. Then you can get a loan (typically for $500 or less).
So, for example, let’s say you borrow $375. You agree to pay a one-time fee of $55, and then you must repay the full $375 in two weeks. However, if you are like most borrowers, you cannot afford the $375 payoff, so instead, you pay the “one-time” $55 fee again to renew the loan for another two weeks. Typical payday loan borrowers fall into the renewal cycle (aka the payday loan debt trap) for about five months of the year–meaning they’d pay $550 in fees on a $375 loan.