The Internet has changed the way we live. Our networks have grown through social media, we have access to more information than we could ever have imagined, and we are able to binge watch our favorite shows on Netflix. While the Internet has certainly changed the way our world works, it has also opened the door to new forms of injustice.
The proliferation of online payday lending is one of those injustices. A payday loan is typically a small dollar, high cost two-week loan. Payday lenders, whose storefronts are found predominantly in low-income communities, advertise their product as a quick fix for unexpected bumps in the road. However, borrowers soon find out that a payday loan is no quick fix. The average national interest rate for a payday loan is 395 percent. In states like Missouri, the interest rate is capped at 1095 percent.
Borrowers often become trapped in a cycle of debt that can last for months and even years. They frequently report shame as a primary motivator for seeking out a payday loan- they don’t want to burden family or friends with asking for money. Many borrowers also express shame about having to physically go to a payday loan storefront. Payday lenders have found a way to capitalize on the shame and guilt often associated with taking out a payday loan- the Internet. Online lenders make the case that loans can be taken out more conveniently and with more privacy than ever before.
Today, one third of all payday loan transactions occur online. Similar to storefront payday lenders, online lenders earn a profit through excessive fees and interest rates. Though the majority of payday loans are still taken out at a storefront, the Better Business Bureau reports that 90 percent of complaints received are from online borrowers. Many lenders have used online lending as a way to avoid regulations, offer more loans, charge more in fees, and gain access to the borrower’s checking account.
Online payday lenders only succeed when the borrower fails. “Industry analysts estimate that, even when charging a $25 fee for each $100 borrowed per pay period, an online lender would need the customer to borrow at least three times in order to earn a profit,” a PEW report noted. Therefore, despite charging a fee rate of 650 percent, the lender relies on the borrower not being able to repay, and thus having to take out several more loans. One way many lenders ensure an extension on the loan is through an automated payment system that only pays the fee and not the actual principal. The only way to begin paying off the loan is for the borrower to continually call their lender and request that money be taken out of their account to cover the fees and loan. The system of online lending set’s up the borrower to get behind on payments while their debt rapidly accumulates.
“One third of all payday loan transactions occur online.”
When a borrower takes out a loan, the lender receives direct access to their checking account. Many lenders use this information to take advantage of their customers by withdrawing false and unauthorized amounts from an individual’s account. Pew found that 32 percent of online borrowers reported unauthorized withdrawals. Often times this leads to overdraft fees for the borrower.
Payday lending, and by extension online payday lending, demands a response from Christians. An industry that knowingly exploits the poor is one that people of faith should not stand for. Principles of economic justice should guide lawmakers and businesses, not a desire for profits earned at the expense of the poor.
In the case of payday loans, government has a particular role to play. Only Congress has the authority to enact a national rate cap on payday loans, which means that for now, any regulation on loans must occur at the state level. Fifteen states have banned payday lending, while nine have set interest rate caps and limits on the number of loans one can take out during a set amounttime. But as of today, the majority of states remain unregulated. A first step is for state governments to pass reasonable interest rate caps. However, in states that do have regulation, the government must close loopholes and ensure that online lenders adhere to the state’s interest rate cap.
Several states, including New York, have outlawed payday loans, and in subsequent court cases ruled that the law extends to online lenders as well. The Consumer Financial Protection Bureau has also taken action in several cases upholding state regulations over claims of tribal immunity, which exempt tribal nations from state law. However, many loopholes still exist which allow online lenders to function outside of certain state regulations. This creates a need for other institutions to take action to protect those being deceived and taken advantage of by the unjust practices of online lending.
Banks must do more to protect their customers from online lenders by giving customers more control over their account. This includes the ability to close an account when necessary, stop withdrawals, and reduce fees that occur when there is an overdraft.
Many banks allow lenders to withdrawal and collect money as they please—even in states where payday lending is illegal—while also prohibiting the account holder from closing down their own account if fees are outstanding. Banks can also help enforce state regulation by reporting payday loans when they are distributed in states where this form of lending is illegal. JPMorgan Chase recently enacted policies that protect the borrower rather than the lender; these include having more control over withdrawals and their account as well as reducing overdraft fees.
Government and banks are two of the key actors in reforming the payday lending industry, however, businesses and the Church also have a role to play. “There will always be a need for fair credit. Households will continue need to bridge gaps between current needs and future income…businesses have a responsibility to design and offer credit on affordable terms to lower income customers,” Rachel Anderson and Katie Thompson wrote in Capital Commentary.
Shame and guilt should not be a primary reason that borrowers seek out an online payday loan, and churches must speak to the shame and guilt that so many feel and remind them of their inherent worth and dignity- no matter their financial situation. Churches can offer biblical models of stewardship and provide spiritual and emotional support to affected borrowers.
Online lenders must not be allowed to take advantage of loopholes and continue to prey upon the poor and desperate. Let us be a people who stand up for the oppressed, who remind government of its high calling, and who hold businesses accountable to principles of economic justice.
-Kara Dry is a senior at Gordon College studying Business and Psychology who is challenged by matters of social injustice and passionate about restoring God's order.