Payday Loans and the Pandemic – Consumer Action

The COVID-19 pandemic devastated economies the world over, and America didn’t escape unscathed. Thousands of businesses went under, millions of citizens lost their jobs, and entire industries disappeared virtually overnight.

The many Americans who suddenly found themselves without a source of income have been scrambling for financial support. Unfortunately, the government’s stimulus checks were akin to little more than a glass of water for a family of five dying of thirst.

Many people have had to borrow money to keep up with their bills, and consumer debt levels reached record highs in 2020. While the pandemic caused spikes in several forms of credit, one industry has been particularly problematic: the payday loan industry, which has always capitalized on the vulnerability of distressed borrowers.

What is a Payday Loan?

Payday loans are short-term, small balance loans that are allegedly intended to help consumers cover their emergency expenses. Traditionally, they have a repayment term of a single pay period (two weeks), after which the lender debits the borrower’s bank account or cashes a post-dated check.

Payday lenders are happy to work with borrowers of all levels of creditworthiness, which attracts those on the lower end of the spectrum. However, they charge astronomically high prices for the privilege of working with them.

Because of their short turnaround times and incredibly high costs, most borrowers struggle to pay them back on time. Many who take out payday loans have to roll them over (pay another large fee to extend the repayment term) or take out another payday loan just to afford the first. That’s known as the payday loan trap, and it often keeps people stuck in an endless spiral of debt.

Did You Know?

Payday loan laws vary between states, but the Federal Truth in Lending Act requires all of them to disclose their interest rates. However, many of them try to direct the attention away from the interest rate and draw attention to their costs as a flat fee. It looks a lot less intimidating that way, but don’t let them fool you.

According to MyCreditSummit.com, the average payday loan has an effective interest rate of 671%. A payday loan of $300 with a two-week repayment term and an interest rate of 671% would cost $77. It doesn’t sound like that much when you only consider the fee, but it adds up quickly. For perspective, your credit card probably has an interest rate of no more than 36%.

The Effect of the Pandemic on the Industry

The pandemic generated widespread financial distress, intense demand for fast cash, and millions of consumers without the income necessary to pay back their debts. These are the perfect conditions for payday lenders, and they leaped at the opportunity.

Reports of increased payday lending have come in across the country, including California, Florida, and the Southern states in general. One study suggests that on a national scale, the rate at which workers took out payday loans tripled during the pandemic.

Wisconsin officials attempted to be proactive about the problem and issued a warning to all payday lenders in the state not to take advantage of the opportunity by raising rates. It was a nice idea, but warnings don’t do much to discourage payday lenders. The industry’s hallmark is taking advantage of people in crisis.

The sad reality is that in many states (including Wisconsin), payday lenders are free to charge whatever they want. Payday loans are regulated on a state level, not countrywide. That makes it incredibly difficult to reign in the industry on a larger scale.

Payday Lenders Stole PPP Funds

As if they hadn’t done enough, payday lenders have also circumvented financial aid intended for struggling businesses. During the pandemic, despite the surge in demand for their services, more than half a billion dollars of funding went to payday lenders from the Paycheck Protection Program (PPP).

That means that payday lenders weren’t just taking money from consumers directly through their usurious and impossibly burdensome loans. They also went behind consumers’ backs and stole the cash that was supposed to bolster businesses and help people keep their jobs.

Those Who Don’t Learn From History

Tragically, the pandemic isn’t the first time this has happened. Payday lenders have been taking advantage of consumers in their times of greatest need for years. During the financial crisis of 2009, payday lenders enjoyed a similarly profitable period.

Wisely, they use their cash surpluses during these periods to consolidate their power. The industry has always been a controversial one that faced significant regulatory obstacles, so they’ve invested in consistent political lobbying for their cause.

Unfortunately, they’ve had a lot of success. They’ve convinced many that they have to charge such high-interest rates to stay afloat while working with risky borrowers, even though studies have shown consistently that their services do more harm than good.

During the pandemic, they took the same tactics. Pro-payday lending parties were able to overturn the law that required payday lenders to verify that their borrowers could repay their loans before offering them one. They’re once again free to lend as they will, without consideration for their borrower’s financial situation.

Better Alternatives to Payday Loans

If you’re struggling to make ends meet due to the pandemic, payday loans are tempting, but they’re not a viable financial solution. They’re far more expensive than virtually any other form of credit, even the options out there for people with low credit scores.

Before you decide to take out a payday loan, make sure to try every possible alternative first. If you need a few hundred dollars or less, paycheck advance apps like Earnin are a great place to start. They bear no interest and cost less than $10 a month to use.

If you need a larger amount, consider using a coronavirus hardship loan through government funding or even private lenders to help get back on your feet. Take a look at our resources page for a full guide to the options available.

This article has been published in accordance with Socialnomics’ disclosure policy.