Predatory payday loans keep getting worse and Congress needs to act


Ronnie Newman is the National Political Director of the American Civil Liberties Union (ACLU).

With COVID-19 continuing unabated across much of the country, racial implications and economic consequences the pandemic are becoming more pronounced.

Millions of people – disproportionately colored – are unemployed, threatened with eviction and struggle to make ends meet and bring food to the table. And how Banks restrict credit and creditIt’s no surprise that predatory payday lenders see this as an opportunity to lure customers in the door.

Payday loan have long been marketed as a tool for low-income individuals and families to gain access to quick cash. In return, payday lenders charge triple-digit interest rates on loans of a few hundred dollars, secured by access to the borrower’s bank account. The requirements for these loans are much looser than for a traditional loan and often only require proof of income and ID in order to obtain the loan.

Read more: Payday Loans: What You Need To Know

A customer exits a payday loan shop on Frederick Rd. In Gaithersburg, Maryland. (Photo by Michael S. Williamson / The Washington Post via Getty Images)

Payday loans are marketed to fill income gaps. But these loans involve high costs and terms that create a debt cycle that usually puts families in a worse financial situation.

In states like Nebraska, the average annual interest rate on payday loans is more than 400%. This is true of the vast majority of states that do not limit the interest rates on the payday loans. The average APR for a personal loan is now almost 10% – or 40 times less than a payday loan.

Families are routinely devastated by the high cost of payday loans. Interest and fees can get out of hand quickly, and many borrowers are opting for another payday loan to help cover these costs and other household expenses. This practice creates a vicious circle in which families who only need a few hundred dollars to make ends meet are caught in the predatory grip of payday lenders and cannot escape.

The negative consequences of the predatory tactics used by payday lenders disproportionately affect color communities in which payday lending businesses operate is in higher numbers. Combined with the Discrimination in Banking That keeps people of color from accessing traditional credit and credit, payday lending is a recipe for economic disaster in marginalized communities.

People wear face masks waiting outside a beauty salon and check cashing facilities as coronavirus disease (COVID-19) continues to spread in the Highland Park section of Detroit, Michigan, April 25, 2020. REUTERS / Shannon Stapleton

People wear face masks waiting outside a beauty salon and check cashing facilities as coronavirus disease (COVID-19) continues to spread in the Highland Park section of Detroit, Michigan, April 25, 2020. REUTERS / Shannon Stapleton

Payday loans have been shown to exacerbate existing racial inequalities in the economy and contribute to the wealth gap in this country. Families struggle to build wealth and save for the future because these predatory institutions take advantage of historically marginalized communities.

As they watched payday lenders target military communities and drive families into financial ruin, Congress and the Department of Defense put a 36% interest rate cap on active service members. Sixteen states and Washington, DChave also discouraged payday lenders from charging outrageous fees and interest, either capping the interest rate or banning payday loans altogether.

This year, Nebraskans have the opportunity to vote on the abolition of exploitative interest rates and fees on payday loans. Nebraskans for Responsible Lending, a coalition of groups including the Nebraska ACLU, aims to cap payday loan interest rates to 36%, which is the rate of many other states and the DOD. But even if Nebraska becomes the 17th state to cap interest rates on payday loans, 33 states will still allow triple-digit interest rates on those loans.

A payday loan sign can be seen in the window of Speedy Cash in North West London on November 25, 2013.  The UK is set to cap the cost of payday loans and tighten its controls over the industry just a month after the regulator said price controls were being enforced

A payday loan sign can be seen in the window of a store. REUTERS / Suzanne Plunkett

The Veterans and Consumers Fair Credit ActIntroduced in Congress last year, it would cap payday loan interest rates to 36 percent for all consumers. But the measure has stalled and has made no progress since it was launched last November.

Our lawmakers have a responsibility to protect all consumers from these predatory loans. Therefore, Congress must act to extend the active duty limit to all Americans.

From there, Congress can also pass laws like the Jobs and Neighborhoods Act and empower more traditional financial institutions that serve Americans, especially colored communities.

Ending predatory lending to citizens in financial difficulty, color communities, veterans and other marginalized groups will not lift every family out of poverty or immediately repair the economic damage caused by the pandemic. But it will ensure that no family in the US is taken advantage of and forced to accept unreasonable borrowing costs in order to make ends meet.

Protecting consumers from predatory credit is a matter of economic and racial justice and Congress needs to take note of this.

Ronnie Newman is the national political director of the American Civil Liberties Union (ACLU).

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