Sophia Nelson: Getting rid of payday loans won't protect our most vulnerable. It will destroy their safety net
Financial emergencies happen to everyone, but not everyone has perfect credit or the ability to access savings, or their retirement fund.
The 2019 elections are behind us now, and everyone’s focus is on 2020. One of the big issues on the table in the coming campaign will be the economy.
Although, the current administration continues to tout historically low unemployment rates as well as start-ups in the small business sector among minorities and college-educated women, these numbers do not tell the whole story.
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Polling and research data reveal startling statistics about America’s wealth gap, financial stability, and access to capital for certain groups in America, including people of color, women, and members of the military.
Let’s be honest, access to credit equals access to opportunity. It also results in greater independence, and it allows borrowers to have more control over their own financial health.
Financial emergencies happen to everyone, but not everyone has perfect credit or the ability to access savings, or their retirement fund.
In November U.S. Reps. Glenn Grothman (R-Wisconsin) and Jesus “Chuy” Garcia (D-Illinois) introduced the “Veterans and Consumers Fair Credit Act,” hereafter, the “VCFCA” which would impose a 36 percent interest rate cap on all consumer loans.
This proposal on its face seems politically appealing. Supporters feel the bill will correct an injustice by ending the practice of payday lending.
Payday loans are small, two-week loans that are criticized because of high fees and borrowers need to renew their loan for weeks or months at a time. But that is not the reality for those who use these products.
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For example: Let’s say you’re a single mom balancing two jobs, barely making ends meet, and your car breaks down. Without money to pay for the repair, and needing your car to get to work, using a payday type lender is often the only option.
So, you borrow $300 and agree to pay back $345 in two weeks. But when payday rolls around you can’t make that payment in full, you pay $45 in fees and roll the loan over ($300 plus $45 new fees) to your next pay period.
This process continues until you’re able to pay back the full loan and fees all at once. Until then you’re stuck paying $45 every paycheck, not making a dent in the loan principal. This “cycle of debt” is why so many groups are concerned about payday lending.
In recent years, however, a new breed of lenders has emerged. They are disrupting two-week payday loans by offering loans that are less expensive, amortizing, and easier to repay.
Polling and research data reveal startling statistics about America’s wealth gap, financial stability, and access to capital for certain groups in America, including people of color, women, and members of the military.
These products have already cut into payday lenders’ business, with payday loan revenues falling ten to twenty percent per year.
What the sponsors of the “VCFCA” don’t realize, however, is that their bill will not only eliminate the payday lending industry – it will also destroy all the businesses that are competing with payday lenders by working to bring affordable credit to America’s vulnerable communities.
Without these new lenders, America’s minority communities, and working poor will be stranded with no safety net and no way forward.
When it comes to economic success and the economic “wealth-gap” people of color and women are disproportionately the victims of redlining or credit scarcity, resulting in higher loan fees, disadvantageous loan terms and more frequent rejection by lenders than whites with similar incomes and credit scores.
Common sense tells us that we shouldn’t further restrict banks’ ability to innovate and help these communities by imposing interest rate caps and choking off access to credit.
Some of the specific economic issues in the national spotlight are short-term, small-dollar loans, non-bank lending, and a product called fintech.
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Fintech refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers. It primarily works by unbundling offerings by such firms and creating new markets for them.
Here are some staggering stats and facts that make this issue one we must consider for many Americans living paycheck to paycheck:
- Over sixteen percent of African-Americans do not have a bank account, relying instead on other, more costly types of credit.
- Women are more likely than men to be “underbanked” and therefore use alternative financial products that usually carry higher fees. This includes women entrepreneurs, who frequently have to use personal credit to start their businesses.
- Over 33 percent of U.S. service members report being behind on bills or having debt in collection, and over half report that personal finances cause conflict with their spouse. http://bit.ly/2Ko8UFz
- If faced with an unexpected expense of $400, 61 percent of adults say they would cover it with cash, savings, or a credit card paid off at the next statement, 27 percent would sell something or borrow to pay for the expense, and 12 percent would not be able to cover the expense at all.
- People with less access to credit are more likely to report financial hardship due to income volatility.
These data points just scratch the surface of what too many Americans of color, poor and working whites, servicemen and women, Indigenous people and veterans experience monthly. A rising tides do not lift all boats, as the saying goes.
Economic inequality in financial services will be a hot-button 2020 campaign issue particularly if one of the progressive Democrats currently running for president gets the nomination.
We can all agree that consumer lending laws need reform and that regulations must be flexible enough to keep up with innovation.
Short-tem, high-interest loans are an issue that lawmakers on both sides must find common ground on. Why? Because it impacts tens of millions of American citizens.
Good financial regulation should be based on data and good policy, not just ideas that are politically expedient.
Sophia A. Nelson is an award-winning author and journalist. Her latest book is “E Pluribus One: Reclaiming Our Founders' Vision for a United America.” Follow her on Twitter: @IAmSophiaNelson