Nonprofits Can Help Consumers Avoid Pitfalls of Payday Loans
Originally posted on NeighborWorks' site.Written by Marietta Rodriguez, Vice President of National Homeownership Programs | 5/16/2016
Payday loans are bad deals for consumers. That's why NeighborWorks is excited to see that Google announced it would no longer accept ads from payday lenders. These ads attracted financially troubled consumers and trapped them in unexpectedly long-term bad deals for short-term money.
Traditional lenders don't often offer short-term, low-balance loans people may need to cover a financial emergency in a pinch. There are lots of people who have little or no emergency savings to pay for a car that suddenly breaks down, or to replace an appliance that quits the proverbial "one day after the warranty expires." But payday loans are actually anchors that can drag consumers into a sea of debt - not stabilize their financial boat.
A 2016 survey from NeighborWorks America found that more than 28 percent of adults have no emergency savings
to cover these sudden costs. The Consumer Federation of America and Pew
Charitable Trusts released similar results. That's one reason that
payday and title loans are used so frequently. These loans often seem
affordable, but when looked at closely, their costs are outrageous.According to the Federal Trade Commission, a $15 fee for a $100 payday loan carries an annual interest rate of nearly 400 percent. And most payday loans are not for $100 but rather for $300 or more. When they are due in two weeks or less, in full, recipients must continue to borrow to pay other loans. What's more, borrowers incur overdraft and bounced-check fees when lenders run their post-dated checks through the system.
In April, Consumer Financial Protection Bureau chief Richard Cordray said the agency continues to prepare regulations for the payday lending market. These regulations are likely to incorporate an ability-to-repay principle.
The convenience of these products masks their costs, and consumers who are cash-strapped could easily see these loans as the best solution to the question: How do I get money right now? However, there is a better solution than these high-cost products, and it starts with better information and better planning. That's where financial capability coaching and counseling come in.
Financial
capability counseling — often provided free or at very low cost — is an
approach that combines financial education, counseling and coaching.
Tax season is a great time to start this kind of program and implement
strategies that maximize monthly cash flow, set a savings plan and
minimize the risk of needing one of these high-cost loans.The trouble is, not enough people are aware of the availability of financial capability services, especially from nonprofit organizations like those affiliated with NeighborWorks.
In a 2015 NeighborWorks America survey, three-quarters of adults said they were unaware of free or low-cost services like financial coaching in their communities. We have to make more people aware of these services because financial capability coaching and counseling works. A project spearheaded by NeighborWorks America found that more than half of clients who didn't have savings before working with a coach or counselor had set aside a median amount of $668 after coaching. That amount goes a long way toward establishing an emergency fund. Importantly, the interaction also had a positive effect on people who already were savers. The median increase in savings for these clients was more than $900. In short, working with a financial coach or counselor helps people prepare for unexpected financial emergencies, enabling them to better avoid high-cost lending products such as payday and title loans, or the need to get their tax refund now instead of waiting a few days.
The centerpiece of financial capability counseling is looking ahead. A great first step in setting personal financial goals — whether they be allocating money for emergencies, developing a strategy to start a business or saving for college education — is to retain a financial capability counselor. It's easier to avoid payday and other high-cost lending traps if you're looking ahead.
