Millions of Americans are facing unemployment and financial hardship due to the COVID-19 pandemic. As people struggle to make ends meet and cover medical bills, payday lenders started aggressively targeting the most vulnerable communities.
Their strategies work too. Borrowers are taking out high-interest loans, choosing a fast financial fix while ignoring the adverse side effects.
A Bad Deal
The primary reason to get a payday loan is a need for fast cash. People turn to creditors for help due to a lack of stable income or an account in a reputable financial institution. Poor credit history is another frequent reason for seeking alternatives.
Borrowers turn to payday lending to bridge a temporary financial gap. Many aren't even aware of the high-interest trap they're forcing themselves into from the get-go.
To make matters worse, figures show that most borrowers get funds to cover ongoing costs, not emergency expenses. Their situation isn't likely to get better in time to repay the loan, which would be their next payday. In the end, such loans cost Americans more than they help them.
Young People's Debt Crisis
The millennial generation is facing more financial instability than its predecessors. The increasing struggle is mostly due to the student loan debt, which they drag into adulthood.
The monthly repayment they have to tackle, in turn, reduces their means of livelihood. Minority communities are finding it especially troublesome to get by after graduating from college.
Impossible to Pay Off
This cycle of constant debt sometimes seems impossible to get out of for an average person. Most find themselves not able to pay their utilities and groceries in the next month while repaying their loan. Then, they might consolidate it by borrowing again, accruing fees and interest rates.
What's more, creditors can sue you if you default on the loan, as long as they follow their set of legal responsibilities. Triggering another avalanche of issues and fees, they trap the borrowers in an increasingly tight spot.
The current administration facilitates the business of payday lenders by not imposing protections for struggling borrowers.
Notably, it removed some significant safeguards. Lending used to be allowed only if the borrower can still afford necessary expenses while repaying. The rule got eliminated in 2019, leading to borrowers taking out new loans to repay previous ones and avoid legal trouble.
Technology as an Avenue
More people than ever use banking apps to control their finances. Following the trend, app-based loan services emerged. They advertise to the new generations with easy access to much-needed funds.
Traditional in-store lending fell in previous years with the growth of the online alternative. This market already gets a part of its influence from the ”easy money” business model. Technology advanced its reach and boosted its target demographics, though.
Future Seems Grim
Overall, the marketing gimmick of a ”quick financial fix” is just that - a trick.
Some people could find payday lending services beneficial in emergency cases such as medical debt. However, the figures show that the principal motivation for taking out these loans has nothing to do with emergencies.
People get stuck in debt traps leading to bankruptcy and damaged credit. It'll only continue to happen without regulations for the lending institutions.