Payday loans are touted as a lending hand when there's none other extended. Trouble is, the hand that giveth also taketh, even from some of the most vulnerable – seniors.
One of every four payday borrowers is a senior citizen receiving social security, according to the Center for Responsible Lending, which recently released the report, Triple Digit Danger: Bank Payday Lending Persists. “This share has risen since our 2011 analysis,” says Ginna Green, a spokeswoman for the Center for Responsible Lending. “Everyone is feeling the pinch of a stagnant economy, but seniors often live on a fixed income, but costs of living aren't fixed, so it's no surprise that seniors are confronting more financial shortfalls. And even those who aren't on fixed incomes, or dependent on social security, or other factors, such as rising medical costs, job loss or foreclosure, can drain the bank – payday loans shouldn't make the problem worse.”
The Center for Responsible Lending is not the only organization crying foul about payday loans. The Consumer Financial Protection Bureau just issued a report on payday and deposit advance loans finding that for many people, these products make a bad situation worse.
“This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden,” said CFPB Director Richard Cordray, in a prepared statement. “For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates.”
Fees for storefront payday loans generally range from $10-$20 per $100 borrowed. For the typical loan of $350, for example, the median $15 fee for $100 would mean that the borrower must come up with more than $400 in just two weeks, points out the CFPB. A loan outstanding for two weeks with a $15 fee per $100 has an annual percentage rate of 391%.
Payday loans may be intended for emergency situations, but they are frequently used for recurring expenses like credit card bills or mortgage payments, says Randall Rice, financial sector analyst for Trillium Asset Management. The CFPB found that many people repeatedly roll over their payday and deposit advance loans or take out additional loans; often a short time after the previous one was repaid. This means that must just keep borrowing at sky-high interest rates. In 2011, according the Center for Responsible Lending, bank payday borrowers took out an average of 19 loans.
“The problem is worse for seniors than others because their income is fixed. People with limited income rarely realize how expensive payday loans are both in terms of principal and interest. While the loan increases exponentially, the senior's income remains fixed,” says David Leibowitz, who specializes in bankruptcy law and is founder of Lakelaw.
Payday loans are illegal in some states, but their prevalence online and via toll free telephone numbers have payday lenders finding the loophole they need to continue preying on seniors who might not be aware of these loans being illegal in the state they live in, making them even more vulnerable and at risk says Leslie Tayne, a financial attorney with The Law Offices of Leslie Tayne.
You should be especially careful with online payday lenders, which are less regulated than traditional payday lenders and often transfer fees directly from a borrower's bank account, warns Rice.
Are payday loans pure evil?
They can serve a limited function. “They may serve a narrow segment of the public who needs credit and otherwise can't get it. However, nobody should borrow from a payday lender unless they know they are able to pay back the loan almost immediately,” says Leibowitz.
“And if that's the case, isn't it better to hold off on making the purchase or paying the debt which the payday loan is facilitating? Was that payment really a matter of life or death? Wouldn't the creditor wait just a few days to the end of the month when the social security check comes in?”
Shame on the lenders
“We would like to payday lenders assess a borrower's ability to repay their loans – it's just common sense. They don't do this and borrowers get trapped in debt when they cannot afford to pay back their loan. The OCC and FDIC are expected to announce new guidance for bank payday lenders. We expect that their new rules will crack down on banks making these 300% loans that trap borrowers. We would like to see the Federal Reserve join them in putting an end to these predatory loans made by banks,” says Green.
Truth is, if you have to keep turning to a payday lender, you have serious financial issues. “Instead of putting a patch on the problem, it's better for senior to probe to see what the root issue is and take steps to resolve it,” says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, whose member agencies can provide help with financial issues.
Think through alternatives. If you are behind on bills, whether they are for utilities, medical expenses, or credit cards, for example, most creditors will negotiate payment plans to help you pay your bills in smaller increment overs a longer period of time, points out Rice. “Speaking directly with your creditors is the best course of action if you fall behind on your bills.”
Look into a loan or grant from local churches and religious organizations, says Green.
Furthermore, many banks and credit unions offer small loans that are much cheaper than payday loans. Says Rice, “Call the banks and credit unions in your area and ask them what type of small loans they offer. Ask what the annual percentage rate is for those loans. Many banks and credit unions offer small loans with APRs of 25-35%, far lower than the rates offered by payday lenders.”