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The Pain of Payday Lending
And how predatory lenders took the TN legislature captive
The need for short-term cash in the form of small loans is growing — especially with current inflation rates and wage stagnation.
Payday loan stores sometimes fill-in the gap — but typically charge very high interest rates, usually at triple digits.
While some states have implemented rate caps and key consumer protections — both preserving access to credit and creating a more affordable source of emergency cash, Tennessee is not among them.
Adam Friedman in The Tennessean digs deep into the payday lending industry in Tennessee, exploring both the impact on borrowers and the influence the industry has over lawmakers.
His piece details the story of one borrower who needed some short-term cash and ended up owing $14,000 on $2500 he borrowed.
Here’s a quick summary of what happened to former business owner Carlos Restrepo:
After defaulting on the loan, Advance Financial sued him, and according to court documents, he will pay back roughly $14,000 on a $2,500 loan. Restrepo will pay over five times the amount of the initial loan thanks to an interest rate made legal by Tennessee lawmakers.
Payday lenders are allowed to offer “flexible credit” or “flex loans” at rates up to 279% APR.
As Friedman notes, this is legal because Tennessee lawmakers opened the door to payday lending and because the payday loan industry’s lobbyists spend heavily to keep the cash flowing without any pesky consumer protections.
You see, payday lenders are the top donors in Tennessee political campaigns.
An investigation by The Tennessean found that by using a half dozen political action committees (PACs), these companies have given Tennessee politicians $4.4 million over the past 10 years. Simultaneously, they’ve spent another $10.4 million hiring some of Nashville’s top lobbying firms to advocate for new types of lending laws and fight potential regulation.
The entire piece is worth a read — it details both the devastation caused by these lending tactics and the reasons why nothing is done to change the climate for borrowers.
I wrote recently about how the current economy climate is becoming increasingly uncomfortable for consumers, which means some turn to payday loans for emergency needs. But it’s bad news when those “emergencies” are grocery and utility bills.
According to a recent survey:
About 23% said they’ve had to use a short-term loan to cover basic expenses. The most common reasons cited were to buy groceries (27.59%) and pay utility bills (30.34%). Other reasons cited included gasoline, car repairs, mortgage or rent payments, medical bills, student loans or child support and alimony.
In Tennessee, covering those emergencies with a payday or flex loan could mean interest rates of 279% (flex loan) or 460% (payday loan). That’s a big price to pay later in order to cover essential costs today.
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The Dark Side of Buy Now, Pay Later
A recent piece by Mary Finnegan that takes a deep dive into the world of BNPL caught my attention.
Finnegan does a great job of presenting both sides of the BNPL debate. That is, consumer advocates are pointing out all the many risks of the products while proponents and founders of BNPL companies point to the benefits side.
Here’s one of the sections I noticed that is, to me, a cause for concern:
BNPL providers, for their part, hope their product continues to be “top of wallet” while expanding credit to historically underserved groups. “The number one most visited physical retail used by Debit Plus consumers right now is Walmart groceries,” said Levchin. “That’s probably the warmest, fuzziest news I’ve heard about the product so far. We want it to be top of wallet. We want it to be the thing that people take to go shopping for their family to give them financial flexibility.”
What? It’s warm and fuzzy that the economy is NOT working for a large number of Americans? So much so that many use BNPL to finance their grocery purchases? Only a 1 percenter who is profiting off of poverty would feel “warm and fuzzy” about grocery debt.
As I noted in a previous story:
One survey indicated:
32% of Buy Now Pay Later plan users have had to skip paying an essential bill such as rent, utilities or child support in order to make their payments. Even after that, 30% report that they’ve struggled to make their payments.