Payday lenders prey on economically vulnerable communities, threatening the well-being of those entire communities, not just their borrowers.
That was the finding of a recent report by the Howard University Center on Race and Wealth, which analyzed payday loan practices in Alabama, Louisiana, Florida and Mississippi. The authors contend that the negative economic impact of the typically small-dollar, high-interest payday loans goes beyond the individual borrowers.
“Payday lenders drain income from the local disposable income base and, therefore, negatively impact the local economy,” the report stated.
It went on to explain that borrowers whose disposable income is used to pay loan interest and fees are not able to purchase goods and services from local businesses, adding an economic hardship to the communities.
In general, the bulk of payday loan companies were found in economically vulnerable areas. The report states:
Based on the location of these lenders, it is clear they target minority and low- to middle-income groups, mostly in highly diverse populated areas. If this trend continues, these areas will no doubt be pushed into poverty.
While the payday loan industry argues that it is filling a need for small, short-term loans, the Howard University report found that the net economic impact is still largely negative. It recommends that the government take steps to regulate the industry before more communities suffer.
“Since our findings demonstrate that payday lenders strip money from their customers and the reduced spending on other goods and services strip the economy of potential gains, it is in the best interest of the entire state for the government to take action to limit these predatory practices and at the same time educate the public about the dangers of payday loans,” the report stated.
The Consumer Financial Protection Bureau is expected soon to release a first draft of federal rules regulating the payday loan industry.
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What’s the appropriate price for a small, short-term loan? Watch this video on one that technically doesn’t charge anything, then explore our solutions center for ideas on the best ways to build credit and get affordable loans.