Many families in our country are going to alternative forms of credit to make ends meet in the current economic crisis. The recent report by the Center for American Progress, or CAP, which analyzes new data from the Survey of Consumer Finances, minority families and low income are more likely to use a class called credit pay day loans in English, which can become a trap for credit and that these families may sink even further financially. 

The pay day loans are made to short-term and high interest rates that require only a source of income and a checking account as collateral.  Generally, the borrower takes a small loan of hundreds of dollars and must pay in full (plus a fee) after your next pay period.  The borrower is unable to cancel the entire loan in a timely manner, to “refinance” or renew the loan by paying a surcharge or bouncing checks and incurring fines and other penalties bank.

The pay day loans are promoted as a convenient short-term credit, but quickly can become problematic for many borrowers to take loans on a recurring basis in case you cannot cancel the first loan.  And many time the cost of returning the loans to borrowers beyond the initial loan amount.  According to the 2008 newsletter of the Center for Responsible Lending, or CRL, a typical borrower may end up paying $ 500 on a loan of $ 300.  The annual interest rates of pay day loans on average exceeds 400 percent and loans to allow appellants to obtain the industry $ 4.2 billion per year in fines and interest on the national level.

According to CAP, “Who Borrows from Payday Lenders?” Typical borrowers of pay day loans include low-income households and households headed by single women and minorities.  In the case of minorities, may not be a coincidence: A study published in March by CRL and called “Predatory Profiling indicates that companies pay day loans aim to actively opening branches in minority communities which tend to live African-Americans and Latinos.  The study, which focused on California, noted that the centers of pay day lending are eight times more concentrated in neighborhoods majority of African Americans and Latinos than in white neighborhoods.  The industry paid approximately $ 247 million in fines and interest in these communities in that state alone.

Previous research conducted by CRL also determined that 36 percent of borrowers of payday loans in California were Latino and 34 percent of borrowers in Texas were also Latinos.  Both states have the largest Latino populations in the country, and in both cases, the percentage of Latinos who seek pay day loans exceeds their share of the population.  Regarding African Americans show a similar picture.  Since low-income minorities are over-represented as borrowers of payday loans, are at increased risk of falling into the spiral of declining loans.

Currently, the only federal law that puts a cap on interest rates that are charged on a pay day loan is the Military Appropriations Act (Military Lending Act) only applies to families of soldiers in active service.  In 2005, Federal Deposit Insurance Corporation also banned the practice “rent-a-bank” and thus ended loophole that allowed these lenders to partner with banks to avoid the limits of the states.  Earlier this year, reintroduced legislation that proposes a national limit and better regulate the pay day loans, but for now the regulation of the industry depends on the states.

Informed citizens and community groups across the country have put pressure on local legislators to demand greater regulation of the industry of pay day loans, especially in Arizona, California and Texas, places with large minority populations.  Some state legislatures including Massachusetts and New York have responded to this pressure by applying limits to the interest rates of short-term loans, while some have banned pay day loans in full.  But as the report “Predatory Profiling” CRL, California, where there is a lot of minorities who purchase pay day loans still have to implement caps on interest rates on short-term loans.

“Legislators are concerned about pay day loans because of high costs,” said Amanda Logan, a research associate and co-author of the report to PAC with Christian Weller.  “Recently there have been bills in the national level, but the state is definitely where we see a lot of movement (with regard to legislation on pay day loans).”

However, Logan cautions that further restrictions on the services of pay day loans must be applied carefully.

As indicated in the report, most people taking pay day loans is not because the only available option, but to cover an emergency, to pay for basic consumption needs and for reasons of convenience.  Therefore, restrictions on the pay day loans must be balanced with other lower-cost credit options for families, as well as greater opportunities for savings.  This will prevent the predatory practices of the industry and yet they give families a way to access to credit when needed and save more money that can be used instead of borrowing.

Tags: pay day loan, pay day loans

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