Places With the Most Payday Loans Obsolete Lenders Tend to Be Low-Income Communities
The coronavirus outbreak has caused millions of Americans without work and financially vulnerable. If consumers are struggling to get by and require an immediate solution to their financial woes and are tempted to take out a loan with high APRs as well as short time frames for repayment.
LendingTree researchers have discovered that payday and other banking lenders are more common in low-income communities, and target people with lower likelihood be able to repay these loans. Black communities are also significantly impacted through payday loan lenders.
The key results
- Payday loans are more prevalent within the South. In the top 10, the counties having the most amount of payday loan establishments per 100,000 inhabitants are all located in the South. Mississippi counties are both the first two places and Louisiana has five of the top 10.
- Payday lenders are more likely to reside located in less affluent communities than wealthy one. The average income for counties with the lowest rates per capita of payday lending institutions is $78,309 however, that number in the highest 10 locations drops to $47,609.
- Payday lenders tend to be located in counties with higher proportions of Black residents. The 10 counties with the highest rate of payday lending institutions have with a Black populace of 20.93 percent, while the rate for the 10 lowest is 8.73 percent..
- The Northeast is known to have the lowest number of payday lenders per habitant. The six counties that have the lowest rates of payday loan establishments are located in the Northeast.
- The wealthier counties of Southern states are less likely to have a lot of payday lending establishments. Loudoun County, Va. is home to an average household of $139,915, was home to only three payday lenders despite having a population of 406,850. There are exceptions, however. Madison County, Miss. was ranked 16th in the country with 14 payday loan lenders and an average household income of less than $76,000.
Payday lenders in certain areas operate at higher rates
Payday lenders and other banking services can help those who have difficulty paying their bills by providing quick cash when they need it, usually without the need for a credit check. However, these loans typically are offered with triple-digit interest rates and shorter repayment terms which make them difficult to pay off, particularly for those who don’t have enough cash to begin with. If borrowers aren’t able to pay for the current payday loan when the payment has been paid, they could decide for “roll over” their loan to a new payday loan, resulting in additional fees and charges but then getting caught in the loop of financial debt.
LendingTree research has revealed that lenders who offer payday loans are most common in areas with low income and suggests that these kinds of lenders target people that are the least likely to pay them back.
Payday lenders are a popular choice for borrowers who cannot afford high interest rates according to our research. There is a strong relationship between the areas with lower household incomes as well as areas that have greater rates of payday lenders per capita.
The most important reason for why payday loans and similar cash advance loans can be so risky in communities with lower incomes is because most people who take out the loans aren’t able to pay back the loan when they are due. For each 5 payday loans taken out, four can be converted into another payday loan within 2 weeks according the most recent data provided by the Consumer Financial Protection Bureau.
Re-paying a payday loan is likely to result in additional costs. The CFPB offers an example like this for a typical two-week loan of $300 could be accompanied by a $45 borrowing charge, which amounts to around a 400 percent APR. If the borrower extends the loan amount, they could be charged another $45 fee for the same amount and the borrower will pay $90 to take $300 out over the course of four weeks. When a loan has been extended over multiple many times, the borrower could end up paying more fees than the loan is worth.
For those with lower incomes it can be a problem because 1 in five payday loan borrowers wind in default, as per the CFPB. The lender could send the loan to collections and the borrower’s earnings could be garnished if there is the court’s order. Thus, the people who earn the least end being the ones to suffer the most.
Black communities have a greater percentage of payday lenders
Alternative banking and payday lenders are also found disproportionately in Black neighborhoods, as our study discovered. The percentage of Black residents living in those counties that have the highest number of payday lenders is greater than what is the proportion of Black residents in the bottom 10 counties with the lowest number of payday lenders. In actual fact, 20.93% of the residents of the counties with the highest rate of payday lenders are Black However, that percentage for counties with the lowest payday lenders drops to 8.73 percent..
The high number of predatory lenders in these communities implies the possibility that Black Americans can be more likely to get caught in the cycle of debt by taking payday loans that are rolled over and over.
An earlier LendingTree study revealed that, despite advances such as lower unemployment and more earnings, Black Americans see less economic growth than Americans in general. The risk of predatory lending is to hinder consumers from reaching their financial goals. Moreover, our research shows it. Black Americans have more predatory lenders in their neighborhoods.
The practice of payday lending is more prevalent in states that have less regulations
The laws regarding payday lending differ by state, which could cause some states to have higher rates for payday lenders. A report released in February of the National Consumer Law Center shows which states have APR limits on loans of small amounts. For example, California, Colorado, New Mexico and Ohio recently introduced or reduced APR limits to shield customers from having to pay unrestricted interest rates. Some states do not have APR caps for loans with a small amount.
Below is the complete list of states that have no cap on the APR on $500 loans that have a six-month time frame for repayment, and the percentage of counties in those states are home to a large percentage of lenders who are predatory.