The economic shutdown of the United States, with its layoffs and bankruptcies, could wipe out 5 to 6 million jobs in March alone, according to at least one estimate.
Many people will have to take a pay cut or have their hours cut. Many of those who do not lose their jobs will have to live with pay cuts or reduced hours. Those at the bottom of the economic ladder will be the most affected and will likely find themselves in circumstances where their incomes cannot meet sudden financial needs. Some will be able to replace their lost income by using overdraft protection on their checking accounts, drawing cash advances from their credit cards, drawing on their savings, taking out personal loans, or borrowing from family or friends. friends.
But not everyone has access to these alternatives. In a country where, according to the Federal Reserve Bank, nearly 40% of adults cannot afford to cover a $ 400 emergency and, according to the Federal Deposit Insurance Corporation, more than 20 million people live in households not banked, the only option is a short term unsecured loan of a small dollar.
Often referred to as “payday loans,” they are lifelines for many. But they are frequently and unfairly slandered.
A recent CNBC article titled “In the face of an economic crisis, these are the best and worst ways to borrow money” represents the widespread bias in favor of short-term credit. He names payday loans as “the worst offenders” among the choices available for quick cash.
In Washington state, media are reporting that financial advisers are warning consumers that the ongoing “coronavirus pandemic could cause a wave of people desperate” to take out “predatory payday loans,” while CNBC (again ) tells readers to “Avoid Payday Loans” in a story on “8 Steps To Take If You Can’t Make Ends From The Coronavirus”.
Despite efforts to poison their reputation, Americans appreciate payday loans. According to Moebs Services, 23 million of us took at least one payday loan in 2018. A Harris poll found that 96% of payday loan borrowers felt their experience was consistent with or better than what they expected. were expecting with regard to the conditions, while 92% said that ditto for the cost. Ninety-five percent said the decision whether or not to borrow from payday lenders should be theirs, not the government’s.
The typical short term loan of a small dollar is around $ 500. Its duration, according to the St. Louis Fed, “usually matches the borrower’s payroll schedule,” so it can be a week, two weeks, or a month. On the next payday, the full loan amount plus fees is due.
The alternatives for those who need quick cash for emergency car or home repairs, unexpected medical bills, or just paying rent and eating in times of loss of income are few and ugly. For example, some who have bank accounts may rely on overdrafts to pass them through. But it is a bad choice. Pew Charitable Trusts claims that the use of overdraft programs is a form of “expensive and inefficient credit.” There should be an emphasis on “expensive”. While consumers spend $ 9 billion per year on short-term loan fees, they pay nearly $ 35 billion per year on overdraft fees.
Those without overdraft protection but who continue to issue checks backed by insufficient funds risk having their accounts closed, and worse. Knowingly paying with a bad check can be a misdemeanor, and in some states, a felony.
Other alternatives when a payday loan is not an option include pawn shops, where interest rates are high, and loss of property – the collateral provided for the loan – is a possibility when the money cannot be refunded depending on the conditions. The most desperate borrowers will be pushed into the clutches of the black market, where they will go into debt with loan sharks. In these clandestine arrangements, interest rates are high and the penalty for late payment may be the loss of the borrower’s health.
As the economic shutdown continues to take its toll, many Americans may simply have no choice but to take out small, short-term loans. Although stringent regulatory regimes make it difficult for lenders to extend credit in some states, payday loans are still legal in 38. Lawmakers in states where lending is prohibited should lift the restrictions, at least if necessary. temporary emergency, so those in need of loans can secure them online without worrying about legal restrictions.
Legal states that have erected insurmountable regulatory barriers, such as California, where a 36% rate cap “is a de facto ban” on short-term small dollar loans because it does not allow lenders to make a profit who will keep them in business, must also relax their rules.
Elected officials need to understand how cruel it is to prevent millions of Americans whose circumstances are very different from theirs from getting the loans they need.
Kerry Jackson is a California Studies Fellow for the Pacific Research Institute and a freelance journalist.