Working as a teacher in Cleveland, Mississippi, was hugely rewarding, Jennifer Williams said, but she sometimes struggled to keep her income stretching from paycheck to paycheck. So one day she borrowed $200, promising to settle with the lender when she got paid soon after.
Soon, Williams found herself in a high-cost loan slump from which it was nearly impossible to extricate herself.
“It sounds great at first, and when you get in, they’ll do whatever they can to get you into the system,” Williams told NBC News. “But it’s like quicksand: you try to get out, but you can’t.”
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The “system” Williams is talking about is the payday loan industry, short-term, small-dollar loan providers with annualized percentage interest rates that can exceed 400%. Typically used by workers who run out of cash before their next paycheck, the loans are easy to receive, don’t require a credit check, and are offered from storefronts and online. A borrower’s actual ability to repay the loan is generally not a factor considered by these lenders, According to the Consumer Financial Protection Bureau.
Payday lenders operate nationwide but are ubiquitous in Mississippi, where Williams lives. According to the Consumer Division of the State Department of Consumer Banking and Finance, there are nearly 800 payday loan/check advance operations in Mississippi, more than double the approximately 300 Starbucks outlets, McDonald’s and Burger King. In the town of Williams, Cleveland, which has a population of 12,000, a Google search found eight payday lenders versus seven banks.
But Williams eventually repaid her loans, with help from a local bank that offered financial education workshops and credit counseling. That bank was Southern Bancorp, an Arkansas-based community development financial institution. Participants in the bank’s financial literacy workshops can receive a low-interest loan after completing the course.
“Weekly workshops were on different financial topics,” Williams said, “saving money, watching your spending.” She completed the program and in 2016, after six years, finally paid off all of her payday loans.
“We take the financial education empowerment aspect of our operation seriously,” Southern Bancorp CEO Darrin Williams, unrelated to Jennifer, said. “We try to be wealth creators for everyone, especially low-income people. It is expensive to be poor – they are caught in trap after trap.
“It’s hard to get out”
Payday lenders and check advance companies say they provide a necessary service – extending credit to borrowers who have no other access to funds, sometimes referred to as the “unbanked”. The Community Financial Services Association of America, an industry lobby group, says 12 million American households use small dollar loans each year.
But many consumer advocates view payday lenders as predatory.
“They are located where people are most in need,” said Beth Orlansky, until recently director of advocacy at the Mississippi Center for Justice, a nonprofit organization that combines policy advocacy with legal services provided to low-income residents. “If you go to areas where the industry has left and people are struggling, you only see payday lenders. It’s very strategic. »
When advertising their products, payday lenders often target black and Latino communities, according to a study published last month by Jim Hawkins, professor at the University of Houston Law Center, and a student, Tiffany Penner. The advertising works, the study finds, with African Americans and Latinos more likely than white customers to use high-cost credit.
In Jennifer Williams’ experience, payday lenders often gave her her first interest-free loan, she said, which made it easy for her to get involved. When she couldn’t repay her initial loans, she said she went to other lenders.
Payday loans typically last two weeks or less and can be made for as little as $100 and up to $1,000. Although these loans are often advertised as helping borrowers overcome occasional financial difficulties, customers often take out new payday loans to pay off old ones, research shows. A 2009 study by the nonprofit Center for Responsible Lending found that 76% of these loans are made to customers who need fresh funds to pay off an existing payday loan.
The Williams experiment also followed this pattern.
“I went to work and got paid every month as a teacher,” Williams recalled. “I needed gas money until the next pay period. By the end of it, I had about nine check advances from five or six locations in three different cities.
When her first loan of $200 came due, she said she went to the lender to pay it off, but ended up increasing the loan to $400, with a repayment amount of 487.50. $. If she were to pay that in a month, the interest rate translates to 264% annualized.
“You don’t know, once you get the money it’s hard to get out,” Williams said. “The average person can’t afford them.”
“A Silent Battle”
In addition to the six-week personal finance course that Jennifer Williams took, Southern Bancorp offers other financial education and counseling programs. The bank offers advice on saving for a home and how to get the most out of tax refunds.
“Often the tax refund is the biggest check a low-income person will receive,” said Darrin Williams, “so we encourage them to save some of it.”
One of Southern Bancorp’s goals is to help people of color build wealth: 80% of recent participants in its counseling programs, for example, have been black. Southern Bancorp also offers a program that matches savings for low-income customers — intended for a home, small business, or college tuition — with federal funds up to $2,000 per person. Of the participants in 108 of these programs, 96% were black.
Having learned to budget and spend carefully, Jennifer Williams says she is now in a much better position.
“I just paid off my car, and so that weight is taken off me,” she said. “I pay all my bills, I live comfortably, without financial stress. Things are really good.
Still, she said her involvement with payday lenders had an impact.
“They prey on the weak and the desperate, the vulnerable,” she said. “It was emotionally draining, a silent battle that I was fighting.”
Nearly 20 states have passed laws to limit payday loans. The most recent was Hawaii, which last year capped annualized interest rates on payday loans at 36% and allowed borrowers to prepay without penalty. Before the change in the law, a borrower who took out a loan of $300 for two months could have paid $210 in finance charges; now that fee is $74, according to an analysis by nonprofit Pew Charitable Trusts.
Payday lenders argue that restrictions on these loans, such as imposing interest rate caps or outright banning them, end up hurting consumers because they create issues like bank overdraft fees when checks are refused and even bankruptcy.
But Lauren Saunders, associate director of the National Consumer Law Center, a nonprofit that advocates for consumers, said research shows borrowers find better alternatives when states clamp down on payday lenders.
“In places that aren’t doing anything to quell it, payday loans are thriving like never before,” Saunders said.
While government stimulus checks and tax credits during the Covid-19 pandemic helped borrowers reduce their reliance on payday loans, those programs are now ending.
“Payday loans are picking up,” Saunders said. “Unfortunately, it’s all too easy to take advantage of people who can’t earn a paycheck.”
Meanwhile, the Consumer Financial Protection Bureau said it was monitoring problem lenders.
“We know these loans can be very damaging, and we have serious and significant concerns about the business models where borrowers are set up to fail,” said Zixta Martinez, its deputy director. “The CFPB will be vigilant and act where we see abuse.”