Payday loan interest rates in the triple digits add to the Appalachian poverty cycle

Payday loans with high-interest rates are simple to obtain and frequently available. However, for many residents, particularly those in Appalachia and other rural areas of Kentucky and the country, these loans may contribute significantly to a cycle of poverty Ipass pretty easy.

What You Should Know

  • Around 200 million Americans reside where payday lending is legal and unrestricted.
  • The average payday loan in Kentucky is $348, with an interest rate of more than 400%.
  • Almost 8% of Kentuckians are “unbanked,” more significant than the national average of 6%.
  • Texas has the highest payday loan rates in the US, at 664 percent, more than 40 times the national average credit card interest rate of 16.12 percent.

Hannah, a single mother of three children from eastern Kentucky who spoke anonymously, said she had had bad experiences with payday loans. After encountering some unanticipated financial hardship during her divorce, she became trapped in a cycle of re-borrowing.

After receiving a payday loan for more than a dozen consecutive pay weeks, it took her nearly two years to break the cycle. Hannah stated that she was saving money even while receiving the loans. She reduced the size of her cable and internet packages. She lowered her thermostat and shut off unnecessary lights. Hannah claimed she even started washing her clothing in cold water to reduce the amount of time the water heater was running.

“My household income was cut by more than half due to my divorce,” she explained. “I still had all of the same bills to pay, but much less money.” The first several payday loans were quite beneficial, but I realized I was in much over my head after about a month. Every time I got one, I persuaded myself that was the final one.”

She claims that even though she no longer uses payday loans, she still suffers the consequences.

“They wreak havoc on people’s credit scores when they believe it will help.” “Every time you apply for a payday loan, they check your credit,” she explained. “It’s not worth going. They have lost business as a result of the pandemic. People will continue to come each month, depending on when they are paid. Most of the time, they are unable to flee due to financial constraints, and they may occasionally wait until tax season to pay it off. They will eventually return for more payday loans.”

Hannah stated that she is currently working on rebuilding her credit and using her experience to educate her children about the hazards of high-interest loans.

“I attempted to disguise my financial problems from my kids, and I think I succeeded for the most part,” she explained. “If they had been older at the time, I believe they could have found it out on their own.” I’ve always worked full-time. My kids had always seen me go to work and come home. There were times when I wondered if I’d ever be able to break free from the payday loan cycle, but I did so by doing what I needed to do and with a bit of luck. I pray no one else has to go through something like this. When money is tight, an expensive kind of borrowing makes little sense.”

The Issue with Payday Loans

Payday loan interest rates can be high and difficult to repay. According to Consumer Financial Protection Bureau research, over one-fourth of payday loans are re-borrowed nine times more. According to a Pew Charitable Trusts analysis, it takes borrowers about five months to pay off their loans and costs them $520 in financing charges on top of the original loan amount.

According to the Center for Responsible Lending, Kentucky’s average interest rate for a $300 14-day payday loan is 469 percent. Senate Bill 165, proposed by Kentucky state Sen. Jason Howell, R-Murray, would increase the fees that consumer lending companies may collect. Howell did not respond to a request for an interview.

According to data submitted to the Kentucky Department of Financial Institutions by the loan processing firm Veritec Solutions, Kentucky citizens receiving payday loans plummeted 20 percent between March 2019 and the start of the epidemic in March 2020. This reflects an $8.3 million decrease in lending in the short-term, typically high-interest loans. According to the research, the average payday loan in Kentucky is $348.

Critics of the sector claim that the loans trap borrowers, notably those in economically devastated Appalachia, in a debt cycle. According to CFPB research, consumers who borrow more than ten times a year account for more than 75 percent of payday loan fees.

Stacy Smith works at a bank in Kentucky. She stated that she would like to see payday loans made illegal.

“I see so many people wind themselves in poor situations as a result of payday loans,” she said.

Breaking the cycle of poverty

Several jurisdictions tried to limit payday loan interest rates in late 2020 and early 2021 to safeguard customers from getting into debt with these usually high-cost loans amid the COVID-19 pandemic.

According to the Center for Responsible Lending, almost 200 million Americans live in states that allow payday lending with few limitations. People sought out payday loans with triple-digit interest rates throughout the epidemic.

According to a recent Gusto poll of 530 small business workers, the rate of workers seeking payday loans has risen due to the epidemic. Approximately 2% of these employees reported using a payday loan before the epidemic, but about 6% reported using this sort of loan since March 2020.

Nebraska residents just voted to cap payday loan interest rates at 36%. According to the Nebraskans for Responsible Lending alliance, the average interest rate for a payday loan before the ballot initiative’s passage was 404 percent. In January 2021, the Illinois state legislature approved legislation capping interest rates on consumer loans, including payday and vehicle title loans, at 36%.

The Kentucky Financial Empowerment Commission’s Kentucky Bank on Network, a statewide collaboration dedicated to boosting bank accessibility and accounts for individuals and businesses across the Commonwealth, is one attempt aimed at getting folks out of the payday loan loop. According to the Federal Deposit Insurance Corporation’s How America Banks Survey, approximately 8% of Kentucky residents are “unbanked,” more significant than the national average of 6%.

“I am happy to bring the Bank On Network to the Commonwealth,” stated Matt Frey, executive director of KFC. “Having a bank relationship is the first crucial step for many individuals and enterprises’ financial empowerment journey.” Organizations and financial institutions have a great chance to enhance their communities by participating in the Bank On Network.”

KBON members include organizations dedicated to promoting account access in Kentucky. Partners will learn from one another as they work to expand Bank On throughout Kentucky. According to Frey, KBON will improve account access for people in need. KBON is a branch of Bank On Louisville. Bank On Louisville, founded in 2010, is a collaborative alliance of local government, financial institutions, and community organizations dedicated to improving the financial stability of Louisville’s unbanked, underbanked individuals. To date, Bank On Louisville has assisted in connecting over 47,000 citizens to safe and inexpensive bank accounts and over 25,500 residents to quality financial education.

“Getting payday loans is a cycle you may get caught up in,” Frey added. “It’s critical to recognize that it’s a cycle because, like many things, you may just fall into a poor habit.” What can you do if you’re a part of a challenging system that’s difficult to escape? What steps can you take to combat that?”

According to Frey, people fall into one of two categories: those who are just getting started in the payday lending cycle and those who have become reliant on them.

“It’s a slippery slope for folks just starting in this cycle, and we want to avoid falling down that slope any further,” he said. “To do that, my first advice to anyone in this circumstance is to become banked find a financial institution near you where you can cash checks for free, so you don’t get charged a 400 percent interest rate or a cost for cashing that check.” Because both the interest rate and the charge for cashing the check will eat away at your income and money that you deserve to keep.”

Joining a bank also allows customers to establish a relationship with the financial institution, leading to further secure and cheap loan alternatives, according to Frey.

“You might be able to secure a $500 line of credit down the road and eventually get access to a mortgage because of that relationship,” he said. “Another advantage of establishing a relationship with a financial institution is that it helps you avoid the trouble.” If you’re talking about Eastern Kentucky, as I understand it, public transportation isn’t a strong suit, so with those barriers in mind, how are you supposed to know what the value of having a relationship with a financial institution set up a bank account is when you can’t even get that started in the first place or can’t even get there?”

According to Frey, life can be expensive when one does not have much money, and pride can often lead to getting into the cycle of payday loans.

“It can be humiliating to ask for a little loan from a family member or a close friend,” he remarked. “However, you must strive to set your pride aside.”

Low-interest microloans from a financial institution and other economic alternatives can also assist people in breaking the cycle of payday loans. Frey referenced Redbud Financial Alternatives, a community development financial company situated in Hazard, Kentucky.

“They offer credit consolidation, educational workshops for recidivism, and basically all kinds of initiatives to assist folks break out of this cycle,” he explained. “There are numerous resources available. As an individual, encountering new situations might be unsettling. This is something that many individuals go through. According to the FDIC, roughly 8% of Kentuckians do not have a bank account, and what can we assume about their payday lending habits beyond that?”

Payday loans for small amounts at high-interest rates are freely available in more than half of the United States. To obtain one, consumers often need to walk into a lender with a valid ID, proof of income, and a bank account.

According to the CRL, only Arkansas, Arizona, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia have payday loan interest caps of 36 percent or below.

States that do not have caps have incredibly high-interest rates. Texas has the highest payday loan rates in the US, at 664 percent, more than 40 times the average credit card interest rate of 16.12 percent. Texas’s ranking improved three years ago when Ohio had the highest payday loan rates at 677 percent. In 2019, Ohio imposed controls on interest rates, loan quantities, and loan terms, lowering the average speed to 138 percent.