Earlier this month, the Consumer Financial Protection Bureau revealed new rules to rein in payday lenders and their outrageous fees. Now, the CFPB needs to take the next step to protect Americans from these corporate loan sharks.
Once upon a time, when the financially desperate couldn’t get help from traditional sources and institutions — due to poor credit or lack of collateral — they sought out loan sharks; unlicensed lenders, who charged exorbitant fees, and charged penalties in the form of threats, intimidation, and broken bones. Like their oceangoing namesake, these predators relied on their innate ability to sense distress to find their prey, and showed little mercy to anyone they put the bite on. Usually connected to organized crime, they frequented the dark back alleys of finance.
Today, loan sharks have gone corporate, and they’re easy to find. They’ve gone legit, and set up storefronts in American neighborhoods across the country. In some neighborhoods, they’re more ubiquitous than banks. They’re called “payday lenders,” because they typically require borrowers to write a check dated for their next payday. The lender cashes the check on that payday, before the borrower can pay for necessities and other expenses. Payday loans cause about 50 percent of borrowers to be hit with overdraft fees, as a result of lenders’ automatic withdrawals; 42 percent had their accounts closed by their banks, when their payments failed due to lack of money in their accounts.
Corporate loan sharks still make their money the same way — by charging exorbitant interest rates and fees, that make debts quickly balloon out of control. According to the Stop the Debt Trap Campaign, the average payday loan carries an interest rate of over 300 percent. Borrowers can’t pay off their loans and cover regular living expenses. So they’re compelled to take out more loans, at high interest, or roll the initial loan over into a new one. Many end up using those additional loans to cover necessities like food and rent.
Some people call that a debt trap. Payday lenders call it a business model, but for those caught in the debt trap, it’s a a nightmare.
Candice Bird took out a $500 payday loan in 2011, while working a sales job, to help cover a car payment. Halfway through the loan period, her lender suggested rolling her loan over into a new one. The second loan set off a two-year cycle of Byrd borrowing repeatedly to cover her mounting debt. Unable to pay her bills, she lost her car and her apartment. She only escaped by walking away from her last two loans, leaving her credit rating in shreds.
When his wife fell and broke her ankle in 2003, Elliot Clarke knew his job as a security guard wouldn’t cover the bills. He turned to payday loans to make up the difference. In short order, a $2,500 loan ballooned to nearly $60,000 in interest. The cycle continued until he received disability payments from Veterans Affairs and Social Security, and was able to pay off the debt.