There’s a new lender in town, and he’s aiming to put predatory loans out of business.
For those in the know, a payday loan—also known as “cash advance” loan or “check advance” loan—is packaged as a short-term, high-cost loan that should be repaid by the borrower’s next payday. Lenders proclaim the due date to be two or four weeks from the date the loan was made, but that’s not often what happens. There is a high correlation between payday lending and low-income households, and borrowers resorting to these loans are often impoverished. It’s no surprise customers frequently miss that kind of pay-off date, and that’s where a payday loan’s interest rate reaches up and throttles you.
State laws set those interest rates, but the army of payday loan lobbyists filling state capitals ensure that rates are exorbitant. States set maximum fees ranging between $10 to $30 for every $100 borrowed. That doesn’t sound too bad until you consider the cost of failing to make the pay off at the end of the loan’s short lifespan. If the borrower fails to disburse the combined loan and interest rate they usually end up opening a new loan at the same interest rate. But this is definitely not the kind of loan you want to roll over. A typical two-week payday loan with a $15 per $100 fee is equivalent to an annual percentage rate (APR) of almost 400 percent. By comparison, the APR on credit cards range between 12 to 30 percent.
Traditional brick and mortar banks don’t offer the kind of small loans that low-income borrowers need to pay a light bill or repair their car, however, so predatory lenders step in to fill a need. It is for this reason impoverished communities like Jackson, MS, and Memphis, TN, see an army of predatory lenders setting up shop on destitute streets. In fact, according to reports, majority-Black cities like Memphis and Jackson have the most payday lenders crawling into strip malls, eager to take advantage of a small-loan lending drought. One study revealed that Memphis’ Shelby County has the highest number of predatory lenders in the state. Cities in the state of Michigan with more than a quarter Black and Latino population have 7.6 payday stores for every 100,000 people, which is about 50% more than elsewhere, according to the Center for Responsible Lending. These companies are pointedly targeting online advertising to those communities.
City leaders and local representatives recognize predatory lenders for what they are and work to discourage them, but state legislators make that difficult. Legislators both Black and white parrot the talking points of payday lenders’ army of lobbyists and claim restrictions would remove a valuable lending tool from low-income communities, as if they’re somehow doing them a favor by letting them be exploited. Then they pass state laws making it impossible to restrict lenders through zoning laws and other local maneuvers.
Knowing rapacious lenders own state legislators, a group of Black clergy leaders in Memphis recently joined forces with Hope Credit Union to launch a “Borrow and Save” program offering small loans to Memphis residents.
“We need to counter their argument that there’s a need (for payday lenders) because there is a need, but we don’t need to charge people 300 or 400 percent interest to fill that need,” said Shirley Bondon, executive director for the Black Clergy Collaborative of Memphis (BCCM). “We don’t need business people to get rich off the poor. That’s not what we need.”
Bondon said the collaborative invested a $50,000 match to Hope Credit Union’s own $50,000 and created a $100,000 pool from which to insure loans between $500 to $1,000.
“We had the Hope Policy Center look, and the average payday loan is between $200 and $500. The rates we charge is 6% to 18% rate, based on your credit, but that’s so much better than a 300-, 400- or 500 percent rate,” Bondon told The Lighthouse. “You have six months for a $500 loan and a year for $1,000 loan.”
Traditional white-owned banks use the argument that they don’t issue small loans of this caliber because there’s no profit to be made from the venture, but the Borrow and Save program does not exist to enrich plutocrats. With no profit motive, the organization needs only to break even, and they’re killing it.
“So far, no one’s defaulted,” Bondon said. “We actually have people paying off their loans early.”
After setting up the $100,000 reservoir to cover inevitable defaults it turned out defaults were not so inevitable. The organizations began making loans available October 5, but the default rate is nonexistent.
Bondon and Memphis clergy hope offering an alternative to payday lenders will make it difficult for lenders to stay above water. Their effort stands a good chance of working because the predatory loan industry apparently can’t exist outside predatory status. They have to squeeze customers in a death grip in order to keep their rich CEOs happy. Such is the evidence coming out of Illinois after legislators lowered payday lenders’ interest rate cap to 36 percent (down from a whopping 404% annual percentage rate.) Earlier this year, Illinois Gov. Jay Robert Pritzker signed into law SB 1792, creating the Predatory Loan Prevention Act. Without their onerous APR, 75% of Illinois licensees offering short-term loans had closed by the end of the year, according to Brent Adams, of the Illinois-based Woodstock Institute.
Unable to exist outside a frame of exploitation without a captured base of customers, Rev. Earle J. Fisher, senior pastor of Abyssinian Baptist Church, is confident a strong competitor can put a dent in payday lenders’ stranglehold on Memphis.
“Payday lending at its core has been historically predatory and I don’t believe it would exist in an economically equitable society,” Fisher told The Lighthouse, “but I am hopeful over time and with enough support for this program, we can begin to shift the trajectory away from economic exploitation and towards economic empowerment for Black folks in Memphis and Shelby County.”