By Charlene Crowell
New reserch from the Center for Responsible Lending (CRL) finds that in just one year – 2022 – cash-strapped borrowers took out over 20 million predatory loans totaling nearly $8.6 billion. The triple-digit annual percentage rates (APRs) and high costs attached to these loans – whether payday, single-payment or installment loans – drained more than $2.4 billion in fees from low-income borrowers.
CRL’s Down the Drain, report provides an update on the effects of payday lending, including online and app-based lending, that remains dominant in low-wealth, largely Black and Latino neighborhoods. Many of these lenders use misleading advertising to lure working people into a cycle of repeat borrowing and growing fees that can leave them struggling for months to repay a debt that reduces each subsequent paycheck.
“Payday loans are designed to trap people in debt and this report shows the scale of the harm,” said report co-author Yasmin Farahi, CRL’s deputy director of state policy and senior policy counsel. “Predatory lending is a public policy choice. Congress and policymakers in states without common sense interest rate limits should enact these usury laws and the executive branch has a duty to enforce them – that is how to keep payday loan sharks at bay.”
Predatory high-cost lenders that offer loans with triple-digit APRs and high, often hidden fees, are trying to evade responsible interest rate limits that currently are in place in 20 states and the District of Columbia.
But these consumer-oriented reforms still leave 30 states where triple-digit interests rates remain legal, including Texas (662%), California (460%), Mississippi (572%), Alabama (456%), and Wisconsin (537%).
These abusive lenders often target working households and communities of color. A 2020 poll by CRL found that Black consumers were twice as likely as white consumers to live within a mile of either a payday lender or a pawnshop. The targeting of these communities can worsen longstanding racial economic disparities.
“Although payday loan fee volume declined early in the pandemic, the Down the Drain report shows a $200 million rebound from 2021 to 2022, reflecting increased strain on consumers’ finances,” said report co-author Lucia Constantine, senior researcher at CRL. “Especially considering changes in the market toward online and longer-term loans, storefront payday lenders in 2022 continued to drain a massive amount of wealth from people and communities with very little wealth.”
Among the report’s notable findings:
Between 2021 and 2022, payday loan fee volume increased in California by 20%, Texas by 22%, and Florida by 17%. All are bigger percent increases than the national fee volume experienced;
States where payday lenders took in the highest fee volumes are: Texas at over $1.3 billion, Florida at over $252 million, California at over $224 million, Mississippi at over $149 million, and Michigan at over $78 million. Mississippi’s payday fee total, the fourth highest, is far out of proportion to its population size, which is the 35th largest; and
In the only two states that collect and report statistics on online lending, the share of online payday lending increased from 2019 to 2022: in Alaska from 55% to 57% and in California from 25% to 49%.
“As national payday lenders have continued to close storefronts across the country, the market share of online payday lending has increased. By 2019, online lending accounted for 41% of single-payment payday loan volume nationally,” states the report.
“Beyond the impacts of the pandemic, the alternative financial services market has shifted online and expanded to include underregulated products like installment loans, earned wage advance, and buy now pay later”, the report continues. “’Rent-a-bank’ schemes, in which a non-bank company uses an out-of-state bank to offer loans that evade state usury caps, have also made payday lending more readily available, even in states with legal protections.”
