Some people are able to pay off such a loan quickly, but the process often ends in debt for the borrower, said Dr. Robert Mayer, a professor of political theory at Loyola University Chicago who authored the book “Quick Cash: the story of the loan shark.”
People take out payday loans because they are “speedy” and “convenient” where “relatively few questions are asked,” Mayer told CNA.
A typical borrower is not necessarily among the “poorest of the poor” who has no credit, he noted, but can be a low-to-middle income working-class person without sufficient savings who needs “fast credit,” perhaps for an emergency expense like a car repair or dental work.
“I think the way household finances work these days, people are living from paycheck to paycheck,” he said, “so a bridge loan that’s convenient, in which people can think they can pay back quickly, can make a lot of sense for people, the way they get started.”
Other borrowers can be simply be those with little to no financial knowledge who are the “ultimate optimists” because they think that their situation – like a part-time job, for example -- will be good enough to pay off a short-term loan, Ehrlich said.
However, because of high rates of interest or fees that are attached to a loan which rolls over to the next pay period, loans not paid off quickly can increase rapidly. The consequences can be serious – many borrowers can go further into debt or face debt collection or asset seizure, the Consumer Financial Protection Bureau says.
Lenders can have access to borrowers’ bank accounts, and if their accounts have insufficient funds to pay the loan, overdraft fees can compound the costs. Thus, those without sufficient financial knowledge, or those without savings who need fast cash to pay for an emergency, can easily become trapped in nasty debt.
The Church has “definitely” been a leader in pushing for reform of the payday loan industry and has historically spoken out against usury, safe Mayer.
In November of 2013, Bishop Stephen Blaire of Stockton, then-chair of the committee on domestic justice and human development for the U.S. bishops’ conference, wrote the head of the Consumer Financial Protection Bureau about payday lending abuses.
Most payday loans are used “to meet recurring, basic needs,” he wrote, but they “are structured in such a way as to make repayment very difficult, initiating a cycle of deeper indebtedness that adds to borrowers’ financial stress, rather than relieving it.”
Such lending is immoral because it “preys on the financial hardship of poor and vulnerable consumers, exploits their lack of understanding, and increases economic insecurity,” he said.
And bishops elsewhere have fought for payday loan reforms, like in Texas, where the state’s Catholic Conference has pushed for regulations at the state legislature.
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On Thursday, the Consumer Financial Protection Bureau proposed new regulations of the payday loan industry. Companies, before lending, must conclude that the borrower is capable of paying back the loan. There are other proposals, like limits on the number of times a lender could access a borrower’s bank account to prevent overdraft fees from piling up if the account has insufficient funds.
Regulations could successfully curb lending abuses, Dr. Mayer said, but they could also carry adverse consequences for some people needing a fast line of credit.
“Insofar as lenders are being forced to be more responsible or more cautious,” he noted, “that can help prevent people from getting trapped in cycles of debt, as long as loopholes don’t open up.”
However, he added, “some people will lose access to emergency credit,” including perhaps those who have successfully paid off such loans in the past without incurring large amounts of debt.
This is where the Church and faith-based organizations could step in to help those who need emergency cash at a low cost. And some groups are already doing just that.
The Society of St. Vincent de Paul in Austin started its loan conversion program in 2014 under Bishop Joe Vasquez, a leading voice for predatory loan reform in the state, after he encouraged them to actively help those saddled with debt.