Working as a teacher in Cleveland, Mississippi was hugely rewarding, said Jennifer Williams, but she struggled at times to make her income flow from paycheck to paycheck. So one day she borrowed $ 200, promising to settle with the lender when she was paid soon after.
Soon, Williams found herself in a quagmire of high cost loans that it was nearly impossible to get out of.
“It sounds good at first, and when you come in they will do whatever they can to get you into the system,” Williams told NBC News. “But it’s like quicksand: you try to get out, but you can’t. “
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The “system” Williams talks about is the payday loan industry, providing short-term and small dollar loans with annualized interest rates that can exceed 400%. Typically used by workers who are strapped for cash before their next paycheck, loans are easy to obtain, do not require a credit check, and are available in stores and online. Whether a borrower can actually repay the loan is usually not a factor considered by these lenders, according to the Consumer Financial Protection Bureau.
Payday lenders operate nationwide, but are ubiquitous in Mississippi, where Williams lives. According to the Consumer Division of the State Department of Banking and Consumer Finance, there are nearly 800 check advance / payday loan transactions in Mississippi, more than double the estimated 300 Starbucks outlets. McDonald’s and Burger King there. In the city of Williams, Cleveland, 12,000 residents, a Google search revealed eight payday lenders against seven banks.
But Williams eventually paid off his loans, with help from a local bank that offered financial literacy workshops and credit counseling. That bank was Southern Bancorp, an Arkansas-based community development financial institution. Participants in the bank’s financial literacy workshops may receive a low-interest loan after completing the course.
“The weekly workshops covered different financial topics,” Williams said, “saving money, keeping your expenses in mind”. She completed the program and, in 2016, after six years, finally paid off all of her payday loans.
“We take seriously the empowerment aspect of financial education in our operation,” said Southern Bancorp CEO Darrin Williams, without any connection to Jennifer. “We try to be creators of wealth for everyone, especially low income people. It is expensive to be poor – they are trapped after the trap.
“It’s difficult to get out”
Payday lenders and check loan companies claim they provide a necessary service: extending credit to borrowers who have no other access to funds, sometimes referred to as “unbanked.” The Community Financial Services Association of America, an industry lobby group, says 12 million American households use small loans each year.
But many consumer advocates see payday lenders as predatory.
“They are located where people need them most,” said Beth Orlansky, until recently director of advocacy at the Mississippi Center for Justice, a non-profit organization that combines political advocacy with legal services provided to low-income residents. “If you go to areas where the industry is gone and people are struggling, you only see payday lenders. It’s very strategic. ”
When advertising their products, payday lenders often target Black and Latino communities, according to one study published last month by Jim Hawkins, professor at the University of Houston Law Center, and student, Tiffany Penner. Advertising works, the study found, with African Americans and Latinos more likely than white customers to use high-cost credit.
In Jennifer Williams’ experience, payday lenders often gave her her first interest-free loan, she said, which made it easy for her to sign up. When she couldn’t repay her initial loans, she said she looked for other lenders.
Payday loans generally last two weeks or less and can be made for as little as $ 100 and up to $ 1,000. While these loans are often touted as helping borrowers cope with occasional financial hardship, clients often take out new payday loans to pay off old ones, the research shows. A 2009 study by the nonprofit Center for Responsible Lending found that 76% of these loans go to clients who need fresh funds to pay off an existing payday loan.
Williams’ experiment also followed this pattern.
“I would go to work and get paid monthly as a teacher,” Williams recalls. “I needed the money for gasoline until the next pay period. In the end, I had about nine cash advances from five or six locations in three different cities.
When her first loan of $ 200 came due, she said she went to the lender to repay it, but ultimately increased the loan to $ 400, with a repayment amount of 487.50 $. If she were to pay this off in a month, the interest rate translates to 264 percent annualized.
“You don’t know, once you get the money it’s hard to come out,” Williams said. “The average person cannot afford them. ”
“A silent battle”
In addition to the six-week personal finance course Jennifer Williams took, Southern Bancorp offers other financial education and counseling programs. The bank offers advice on home savings and the best use of tax refunds.
“A lot of times the tax refund is the biggest check a low-income person will get,” said Darrin Williams, “so we encourage them to save some.”
One of Southern Bancorp’s goals is to help people of color get rich: for example, 80% of recent participants in its counseling programs were black. Southern Bancorp also offers a program that pairs savings from low-income customers – intended for a home, small business, or tuition – with federal funds of up to $ 2,000 per person. Of the participants in 108 of these programs, 96 percent were black.
Having learned to budget and spend wisely, Jennifer Williams said she is in a much better position now.
“I just paid for my car, so this weight doesn’t weigh on me,” she said. “I pay all my bills, I live comfortably, without financial stress. Things are really good.
Still, she said her involvement with payday lenders had taken its toll.
“They prey on the weak and the desperate, the vulnerable, ”she said. “It was emotionally draining, a silent battle I fought.”
Nearly 20 states have passed laws to curb payday lending. The most recent was Hawaii, which capped annualized interest rates on payday loans at 36% last year and allowed borrowers to prepay without penalty. Before the law changed, a borrower who took out a $ 300 loan for two months could have paid $ 210 in finance charges; now that fee stands at $ 74, according to an analysis by Pew Charitable Trusts, a nonprofit organization.
Payday lenders argue that restrictions on these loans such as imposing interest rate caps or outright banning them end up hurting consumers as they create problems like bank overdraft fees when checks bounce and even bankruptcy.
But Lauren Saunders, associate director of the National Consumer Law Center, a nonprofit that advocates on behalf of consumers, said research shows borrowers are finding better alternatives when states hold back payday lenders.
“In places that are doing nothing to crack down, payday loans are flourishing like never before,” Saunders said.
While stimulus checks and government tax credits during the Covid-19 pandemic helped borrowers reduce their reliance on payday loans, these programs are now ending.
“Payday loans are picking up again,” Saunders said. “Unfortunately, it’s too easy to take advantage of people who can’t earn a paycheck.”
Meanwhile, the Consumer Financial Protection Bureau said it was on the lookout for problem lenders.
“We know that these loans can be very damaging, and we have serious and significant concerns about the business models where borrowers are set up to fail,” said Zixta Martinez, its deputy director. “The CFPB will be vigilant and will take action where we see abuse. “