What is a payday loan?
Payday loans are small-dollar loans (usually $200 – $1,000) with interest rates as high as 450%. Unlike a typical loan, payday lenders require the borrower to pay off the loan in full on their next payday.
The “payday debt trap”
Payday lenders require direct access to the borrower’s bank account and make these loans without fully investigating the borrower’s ability to repay the loan. Borrowers unable to pay off the loan by their next payday often re-borrow, leading to “the payday debt trap.”
The debt trap is most severe in low-income communities and communities of color, where many people don’t qualify for conventional bank loans or credit cards.
The payday loan debt trap harms the fabric of our community
Based on annual data reported to the Department of Commerce, the reform coalition Minnesotans for Fair Lending estimate that between 1999 and 2014, payday loan fees and interest drained more than $110 million from communities statewide – more than $13 million in 2012 alone.
That money drained amounts to over 56,000 trips to grocery stores. This amount of financial distress has devastating physical, emotional and psychological consequences over time.