Did you know that a serious issue plagues women of color? They are purposely targeted by payday loan lenders.
Have you ever wondered about payday lenders? Why they’re often in neighborhoods with vacant shopping centers and boarded-up businesses?
These payday lenders pretend to be superheroes. In reality, they are targeting communities of color.
They settle in low-income areas and then target individuals with low incomes.
They also assist refugees and single parents. This worsens the monetary burden of refugees.
Payday lenders contribute to the racial wealth gap. And it affects so many women of color nationwide.
But before we expand on this, let’s discuss what payday loans are.
What is a payday loan?
Payday loans are expensive cash advance loans or short-term loans. They must be repaid in full by the borrower’s next payday.
To obtain a loan like this, you will be asked several questions. Your Social Security number, I.D., a bank account, and a job will be requested. Usually, there’s no credit check involved in getting a transplant.
Online lenders are offering online loans that make it simpler to lend. Borrowers are not required to pay any interest fees if their loans are paid in full. Unfortunately, most of them are not.
How payday loans hurt borrowers
These short-term loans are for people with difficulty making monthly payments. They have expenses and have to obtain money quickly. Borrowers who do not have credit cards or bank loans can utilize payday lenders.
Tragically, payday lenders charge high rates of interest in urgent situations. If they default, they face exorbitant penalties.
Most payday loans have 300% to 500% annual interest rates. We’re talking about 200% – 500% APR!
A Pew Charitable Trust study found that 12 million Americans have taken out payday loans every year. Most people cannot afford to repay these loans when it’s time to pay them back.
In the PEW study, the average payday loan was $375. Borrowers paid $520 in interest.
Consumer Financial Protection Bureau data finds that roughly 20% of payday loans end in default.
the Truth in Lending Act demands that the lender disclose the upfront cost of a payday loan to the borrower before he or she agrees. However, these terms can be complicated. Consequently, the true price of same day payday loans is not always clear.
Instant payday loan lenders prey on communities of color, primarily women
Communities of color, notably Black communities, have historically faced unfair loan practices.
For these villages, the lack of banking services is the greatest obstacle, and they commonly do not understand the terms of fast loans. They are also unaware that these lenders typically charge extra fees for borrowers who are unable to pay on the due date.
Used to help cover living expenses, loans like this are predatory lending. Lenders don’t check your ability to pay the loan, only that you have a job and a bank account.
A typical borrower has the following traits. They are young, have children, do not own a home, and do not have credit.
In an emergency, people will do many things differently. They might pay their bills late, use up their savings until they run out, or ask family and friends for help. But the difficulty arises when every possible option has been used.
Instant payday lenders offer a speedy service if you need money for an emergency. But you could end up paying up to 400% interest per year! This means that what is good can quickly become bad.
The gender wage gap affects the ability of women of color to pay back loans
Women and people of color face significant barriers to fair wages, which are one of the economic statistics that harm them the most.
Women are paid 83% of what men are paid. Women make only 17% less than men on average.
However, the number of deaths from coronavirus is greater for minorities of color. For those of African American descent, $1 in pay is worth just 63 cents. The wage gap for Latina workers is $0.55.
Female minorities, such as Black and Latina women, are more likely than white women to be the sole breadwinner for a family. Black women are the most likely to support their families economically, followed by Latina women.
This means they need more income to support their families. Nevertheless, they are severely underpaid.
So low income women are perpetually in danger of financial collapse due to unexpected expenses. Because of this, they often resort to getting same day payday loans.
This has a bearing on their capacity to build credit, get out from under debt, and break out the cycle of poverty.
The importance of financial literacy for women of color
A recent study conducted by TIAA Institute titled “Financial Literacy and Wellness Among African Americans” found that African Americans have very low levels of financial literacy.
The financial literacy gap exists among African Americans regardless of gender, age, income, or education.
However, the TIAA/BAFI reports that financial literacy is significantly higher among men than women. There is a seven percentage point gap between African-Americans and women. The income gap remains even when other factors are considered.
Credit scores and homeownership
Only 43.4% of Black families own a house compared to 72.1% of white families.
The proteome disproportionately harms Black mortgage borrowers’ credit scores, and their debt-to-income ratios are typically low. Plus, the test is unfair to them. Failing to pay a payday loan on time can damage one’s credit rating.
The benefit of healthy credit and the advantages of black homeownership matter. This could help close the gap between rich and poor.
Poverty will not disappear through education alone. However, financial knowledge is the key to slowing the cycle.
Financial literacy is crucial for women of color to attain financial independence. This is why our free financial literacy programs are designed to help such women gain financial wellness.
What to do if you got a payday loan and can’t pay it back
Perhaps you had some short-term financial needs and took out a payday loan. Maybe you didn’t have much choice and now you are having difficulty repaying it.
Unavoidable emergencies are no reason to get a cash advance. Here are some suggestions for avoiding financial difficulty in the event you’re unable to pay back a payday loan.
Paying back a loan with high interest rates can be difficult. But there are methods to deal with it.
Payday loan alternative options that can help women of color
Women of color who turn to same-day cash loans often don’t realize they have an alternative loan option.
Credit cards are not a substitute for an emergency fund. Even the highest credit card interest rate will not be greater than triple-digit payday loan interest rates for a short-term loan.
Lending circles are common in communities of color. These lending circles, also known as a Tanda, Sociedad, or Susu, often help to save for a long-term goal. Unfortunately, they may not be available when needed most.
What States can do to help consumers
To prevent borrowers from being trapped in a loan cycle, 16 states have banned payday loans. And they have capped interest rates on short-term loans to protect borrowers from costly financing.
These recommendations from the National Consumer Law Center will also help states protect consumers from high-priced loans.
Changes in policy
Unfortunately, the FDIC announced in 2020 that it would repeal two key policies. These policies aim to protect the most vulnerable consumers from high-cost bank payday loans above 36%. Although many states have adopted a 36% annual interest rate cap, many have not.
Critics of the interest cap argue that these policies will deprive disadvantaged communities of vital loans. I would point out that these policies help safeguard vulnerable communities from predatory lenders while also assisting them.
What banks can do to help consumers
Banks are not willing to make small short-term loans available for those with poor or no credit histories. Although this would be a good payday loan option.
But cutting off access does not solve the problem of low incomes. Instead, it promotes a costly safety net: instant payday loans.
Cash advances and personal loans are necessities for many individuals who do not have the privilege of having a bank account or credit card. Banks should not penalize people in need the most by penalizing their financial accounts.
Help is needed from everyone to stop payday loans unfair practices
One way to protect women of color from the predatory lending practices of payday loans is capping interest rates. Fair wages, financial literacy, and fair lending practices are other ways to increase financial security.
Nevertheless, the process is more difficult at every level, from government to banks to communities.
Women and minorities can play their roles by promoting financial literacy in their families and communities. And these free online financial classes can help you learn how to budget and reach your goals.