Several weeks ago I took out a payday loan to help get through the pandemic. The plague itself was both everywhere and nowhere at the time, but my needs were concrete. I knew I wanted to have at least two weeks of food on hand, I needed more money to get it, and online lenders make funds readily available.
I also needed a payday loan because I moved back to New York from Texas with a full-time job at a telecommunications company, with benefits and making $17 an hour ― just enough with the right rent and careful planning to barely get by in NYC 2.0, but not enough to save, not enough to face any straitened circumstances. Yet here was COVID-19, as well as a bad housemate situation that triggered a series of anxiety-causing money issues, along with allergies to the six cats in my apartment.
I began looking for a new place as soon as this all became clear, but ran into the usual apartment search difficulties that exist in the city even without an ongoing crisis ― price, suitability, age discrimination ― along with the added pressure of having no sanctuary at my home.
Loathe to borrow from friends, broke from the upfront rent on the new place, fully aware of how utterly wrong the decision was, I pulled the trigger on a $200 loan. I already knew the company from having used them during another jam-up a few years ago.
That $200 worth of groceries will end up costing me $550 due to the sky-high finance rate that came along with the loan. And like me, most of the millions of other customers who patronize the bewildering panoply of payday loan companies find themselves agreeing to astronomical terms. In my case, it was a 615% APR (annual percentage rate).
If I can manage to pay it off early, I will avoid the remaining finance charges, but who can pay anything off early in a pandemic? I still have to worry about housing, job and food security.
As a previous and, therefore, “VIP” customer, I was allowed to delay my first payment, with the rest still remorselessly hoovered out the moment my paycheck is deposited.
These businesses are some of the worst predators that metastatic Late Capitalism conjures: Without tight regulation, they should not exist; much fairer alternatives have been proposed. The industry lobbies strenuously and expensively against every hint of restraint or consumer protection. They require us to be, in the economically narrow sense, “financially naive,” requiring an effort of thinking through delayed consequences — an effort that financial stress renders ever more difficult.
A 2019 study found that 40% of American households lack the cash on hand or assets to weather three months of income crisis at poverty level. Therefore, that large percentage of working Americans with often bad-to-no credit are frequently forced to turn to these loans to get through the entire register of debts ― utility bills, auto payments, medical needs ― and are also often forced to roll their loans over or take out new loans to pay on the first. This piles up enormous sums of debt that then become a new and worse crisis.
“If I can manage to pay it off early, I will avoid the remaining finance charges, but who can pay anything off early in a pandemic? I still have to worry about housing, job and food security.”
Payday/installment lenders depend on and take advantage of cognitive biases. One’s sense of optimism and self-control are in play. Thanks to how the decision-making brain evolved, there’s another bias at work as well: hyperbolic discounting, which chooses a more immediate and smaller reward (the cash) over a later and better reward (like not having the debt).
Because the loans have such short terms, repayment is difficult; a design intended to encourage ― if not require ― repeat borrowing. Those repeat customers generate the bulk of lender profits, and private equity has flooded into online lending to reap those enormous profits. Eighty percent of these loans rollover and 20% end in default ― often with borrowers being sued by lenders and even on the hook for the lenders’ legal expenses. To make matters worse, these payday lenders’ brick-and-mortar locations are predominantly and rather ruthlessly sited in poor and working-class, “underbanked” areas.
A January 2014 report by the inspector general for U.S. Postal Service proposed having it offer financial services as a boon to consumers and a new revenue stream for the USPS. Sen. Elizabeth Warren (D-Mass.), a longtime consumer advocate, presciently backed the idea, which in offering basic banking services, including small loans and check cashing, would combine payday loan reform with the help the USPS needed then ― and now more than ever.
There is a federal agency created for protection from these raptors. The Consumer Financial Protection Bureau (CFPB) was first proposed in 2007 by Warren (then a Harvard University law professor) and passed as part of the 2010 Dodd-Frank Act in response to the 2008 Great Recession.
During a 2010 Wisconsin effort to effect a 36% rate cap on payday loan lenders in the state, Speedy Loan Corp owner/president Kevin Dabney and other lenders flooded the field with enough cash to defeat the measure while flouting campaign finance laws, drawing a measly $6,050 fine ― just one example of the forces arrayed against reform of the “fintech” market.
“Thanks to how the decision-making brain evolved, there’s another bias at work as well: hyperbolic discounting, which chooses a more immediate and smaller reward (the cash) over a later and better reward (like not having the debt).”
In a 2015 speech, President Barack Obama touted a new rule the CFPB was to enforce to better protect consumers from “getting stuck into ... cycles of debt.” He warned the industry that outlets making their profits that way would have to “find a new business model.”
The rule was to take effect in January 2018, but it was delayed by the CFPB’s then-acting director, Mick Mulvaney ― who, as a Republican House member from South Carolina, took campaign donations from the industry and tried to do away with the agency. And last December, CFPB Director Kathy Kraninger announced the regulation would not take effect in order to “encourage competition in the payday lending industry.”
The industry had been lobbying against the changes since 2017, when they were first proposed by the bureau’s then-director, Richard Kordray. In 2018 and 2019, the industry’s trade and lobbying group held its annual convention at the Trump Doral resort in Miami, resulting in roughly $1 million being paid to a Trump-owned business.
The Trump administration consistently has been attempting to drain the bureau of power, and the Supreme Court is due to issue a ruling in June on a case that challenges the constitutionality of the CFPB’s structure. Justice Brett Kavanaugh, in a dissent he wrote while still a U.S. Court of Appeals circuit judge, already called the scope of the CFPB director’s job an unconstitutional “power that is massive in scope, concentrated in a single person, and unaccountable to the president.”
Would I take out another loan? While it’s never pleasant to experience a loss of agency (or necessarily to claim victimhood due to it), some neuroeconomists posit a “marketplace in the brain” that can tend to make it less a choice and more of an instinct. The midbrain dopamine system, regulated by the more “lizard brain” part of the limbic system, gets involved: “I need this now and I’ll worry about the consequences later.”
“I’d like to think I wouldn’t do it again and I certainly can’t recommend the incredible debt burden that comes with one, but present circumstances have me living on a get-by wage during a pandemic and I can’t rule it out.”
Common sense can also be short-circuited by conditions of ― or merely the threat of ― poverty. A sense that you have less control and fewer resources triggers the need for immediate relief to reduce the threat. In this case, as for most who go looking for installment or payday loans: cash.
I’d like to think I wouldn’t do it again, and I certainly can’t recommend the incredible debt burden that comes with such a loan. But present circumstances have me living on a get-by wage during a pandemic and I can’t rule it out.
As someone lucky to still have his job as the epidemic continues, my economic survival plan relies on the savings from not going out, eating at home, the new government assistance, and the hope for some kind of rent relief — all while doing whatever I can to stay healthy. Still, with the economic pressures I might face, even after looking at the terms, under the wrong kind of squeeze, I still might hear the voice of Llewelyn Moss from “No Country For Old Men” in my head saying, “I’m planning to do something extremely stupid, but I’m going to anyway.”
The last and perhaps most pernicious side-effect of turning to a payday loan company for help is that a borrower’s information is aggressively sold or otherwise disseminated to dozens of other similar services, and this generates a deluge of text messages and phone calls touting the ever-increasing amounts for which you’ve been pre-approved.
The parent companies’ crisis letters to their investors tout tightening requirements on borrowers, but one line in particular spurred me to action: “We are offering assistance to borrowers during the crisis in the form of deferred payments in some cases.”
In my case, I was given the opportunity to defer one payment and encouraged to call in before the next was due to “update them on my situation.” Given the toxic atmosphere around the entire endeavor and these companies in general, it seemed like a minor miracle.
Or, as a Christian payday loan company (one of many in the market) put it in the come-on text to me above: your prayers have been answered ― but I know that kind of salvation comes with a steep price.
David Williams is a musician (Beautiful Supermachines), producer (Jungle Brothers, Total Abuse), and audio editor. His writing has appeared in The Austin Chronicle, Austin American-Statesman, Spin, and The Dallas Morning News. You can follow him on Twitter at @David_Williams.
This article was supported by the Economic Hardship Reporting Project (@econhardship).
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