Author: Jean Cyprien, Coordinator, Student Money Management Center
While the discriminatory practices of redlining forced many Blacks to live in communities with low equity growth, payday loans targeted these communities, which only further widened the Racial Wealth Gap.
A payday loan is a short-term unsecured loan, often characterized by high interest rates. The basic loan process involves a lender providing a short-term unsecured loan to be repaid at the borrower's next payday. Typically, some verification of employment or income is involved (via pay stubs and bank statements).
Borrowers typically will visit a payday lending store and secure a small cash loan, with payment due in full at the borrower's next paycheck. The borrower writes a postdated check to the lender for the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower does not repay the loan in person, the lender may redeem the check.
In an article entitled, Fraud and Abuse Online: Harmful Practices in Internet Payday Lending, “one issue which was never raised during a Federal Trade Commission Workshop in any of the discussions - the fact that payday loans do not hurt equally. More than all other races or ethnicities, payday loans disproportionately impact African Americans. Black people make up roughly 13% of the total American population, yet they constitute 23% of all storefront payday loans.”
The likelihood that a family will use a payday loan increases if they are unbanked or underbanked, or lack access to a traditional deposit bank account. In an American context the families who will use a payday loan are disproportionately either of Black or Hispanic descent, recent immigrants, and/or under-educated. These individuals are least able to secure normal, lower-interest-rate forms of credit. Since payday lending operations charge higher interest-rates than traditional banks, they have the effect of depleting the assets of low-income and Black communities.
One way to empower yourself and others in your community against the use of a Payday Loan is connecting with The Student Money Management Center (SMMC) to learn the principles of effective money management. For example, establishing an Emergency Savings Fund can help protect you from things such as unexpected bills or job loss. In other words, an Emergency Savings Fund helps protect your financial well-being.
Payday Loans look like heroes to those who are low on hope and feeling desperate. According to the Consumer Financial Protection Bureau (CFPB),”Payday Lenders will usually charge a fee for every $100 they loan. Oftentimes, this fee is anywhere from $10–30. For example if you took out a $200 loan with a fee of $30, that fee is equal to an annual interest rate of 391.07%. But if you can’t pay it back, the lender might slap you with late fees, repayment plans, or offer you a rollover (plus another fee).”
Christine Luken, author and personal finance blogger, found this out the hard way. “Before I had an emergency fund, if I had an unexpected car repair or a vet bill, I had two problems,” she says. “The original emergency and a money problem.” Unlike payday loans, your Emergency Savings Fund is your get out of debt card, your, I lost my job answer, your car broke down repairman...you get the picture.
Let the SMMC walk alongside you to assist with starting your Emergency Savings Fund. Did you know by just putting aside $20 a week, you can save more than $1,000 in just one year? We can help you by first determining your monthly income and expenses. Set a goal of how much you want to save; studies suggest beginning with $1,000. We can help you develop a plan based upon your goal and ways to stick to your plan.
By taking control of your money today, you can equip yourself and the next generation from living paycheck to paycheck. Don’t let payday loans catch you in the middle of a financial crisis, because your savings is designed to do that
We are here for YOU – Make an appointment today by emailing us at SMMC@ung.edu
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