The most recent data available from the Consumer Financial Protection Bureau (CFPB) estimates that twelve million Americans will take out payday loans this year, generating $9 billion in loan fees for payday lenders. Yet this massive wealth transfer is coming directly from our nation’s working poor – the average payday borrower makes only $30,000 a year. Because these vulnerable borrowers can rarely afford a full repayment on their next payday, most pay only interest and renew the loan, incurring further fees and triggering the infamous payday lending cycle.
In Minnesota, for example, 80% of borrowers are unable to repay on time, and loans are renewed an average of 10 times, accruing interest and fees with each renewal. Yet when consumers complain to their payday lenders that they are violating the laws of their state, many are told that their state’s laws simply don’t apply because the lender is part of a Native American tribe.
It’s clear that these desperate borrowers are among the least able to afford such an expensive loan product. So how did America’s low-income workers become a $9 billion cash cow for high-APR corporate lenders? And how did Native American tribes and their sovereign immunity become such a critical part of the conversation?
So how did America’s low-income workers become a $9 billion cash cow for high-APR corporate lenders? And how did Native American tribes and their sovereign immunity become such a critical part of the conversation?
Payday loans are small, short-term consumer loans that help people “make it to payday.” Lenders advertise payday loan products like Band-Aids for emergencies, like when your tire pops or you need an unexpected root canal. This helps to justify the exorbitant interest rates – over 600% in some states. However, 7 in 10 borrowers rely on payday loans not for emergencies but for regular expenses like rent and utilities. The reality is that most borrowers don’t need payday loans for a quick expense, but to cover bills that are coming due before their next paycheck hits.
American work norms create cash flow problems for low-income workers, since they don’t have the money they’ve earned when they need it. The most common pay period is bi-weekly, with semi-monthly or monthly payments also common in many industries like mining, transportation, and hospitality. Payday loans end up bridging the up-to-four-week gap between the time workers provide their labor and the time they get paid for it. With 80% of American workers living paycheck to paycheck, and many employers unwilling to provide cash advances to employees, millions of people have to choose between high-cost loans or being late on their bill payments. Late payment can also mean fees or overdrafts, furthering worsening a worker’s financial situation.
After taking out a payday loan, most borrowers’ problems have just begun. The majority end up in a cycle of loan renewal fees, as their short-term loan turns into a long-term burden. In fact, the majority of borrowers end up paying more in fees than they originally received in credit – an average of $520. One in four payday loans nationwide are re-borrowed 9 times or more.
When I was investigating payday loan complaints as an investigator at Montana’s Office of Consumer Protection, I quickly discovered a curious phenomenon: many of these payday lenders were associated with Native American tribes.
“As soon as you get your first loan, you are trapped unless you know you will have the 300 extra dollars in the next two weeks,” said single mother Lisa Engelkins in her testimony to the Center for Responsible Lending. She borrowed a principal of only $300, but because the extra money to pay off the loan never materialized, she could only afford to keep renewing the loan and paying those fees. She ended up renewing 35 times – paying $1,254 in fees over 17 months. “I felt like I was in a stranglehold each payday,” Lisa said. “After a while, I thought, ‘I’m never going to get off this merry-go-round.’”
Payday loans are financial products, sold by corporations, which keep people trapped in a cycle of fees, stuck in a paycheck-to-paycheck lifestyle, and incapable of creating savings or enjoying financial security. Regulating these corporations has become a complex endeavor for both federal and state authorities.