Over the last ten years, payday and auto title loans have sucked an estimated $1.6 billion a year in cash out of the pockets of low-income people who would have otherwise spent the money on goods and services. That’s cost Texas roughly 2,100 jobs per year that could have been supported by that increased spending.
These are the findings of a first-of-its-kind study released Tuesday by the Perryman Group, social justice advocates Texas Appleseed and the Texas Fair Lending Alliance.
These high-cost, small-dollar loans are often marketed as short-term solutions to people facing a cash crunch, but most borrowers don’t pay them back on time, adding significant cost and often pushing people out of financial stability and into crisis, says Ann Baddour of Texas Appleseed.
“We see that individual economic hardship individually very clearly, but we’ve never been able to quantify how that individual hardship impacts the broader community,” until this report, Baddour said.
The report drew criticism from the Consumer Services Alliance of Texas, which lobbies on behalf of the industry in Austin. The group’s executive director, Robert Norcross, said the study “indicates a fundamental lack of understanding” about the industry.
“The study ignores the positive economic impact of loan proceeds, incorrectly assumes loan repayment data is reported to credit bureaus, and erroneously draws conclusions based on decades old data in contrast to the financial experience of today’s small, short-term loan borrower,” said Norcross.
By the numbers
Ray Perryman, whose economic analysis firm crunched the numbers, said the study used the same peer-reviewed economic impact model he uses to help corporations and governments assess the impact of specific policies and interventions.
“If it were not for the payments that are made on these loans, that [money] basically would otherwise be in the consumer stream of Texas because people in lower income categories spend almost all their income,” Perryman said. “If this money had not flowed into these payments, then that money would have been circulating in Texas.”
Essentially, Perryman said, low-income people spend the money they earn. They rarely have the opportunity to save much. So if they’re spending money on sky high fees and interest associated with payday and title loans, they’re not spending it on other goods and services. Corporate profits and investment returns are often not spent in the same direct way.
Perryman said about one in 15 Texans have taken out a payday or auto title loan. Beyond the $16 billion, Perryman said the true toll of payday and auto title loans is much larger, if the tally includes the collateral consequences.
“It's not just that money that leaves the area. It's the fact that their cars repossessed so they can't go to work, so they lose their job. It's the fact that that they end up selling the few assets they have in order to try to pay this back,” he said. “So there's we haven't even begun to scratch the surface of the costs. This is just the leakage in spending is all we're measuring. And the overall economic cost of this is much higher.”
High costs
Texas has some of the laxest regulations on payday and auto title loans in the nation, and Texans pay some of the highest rates. The Center for Responsible Lending found the average annual rate on a $300 payday loan in Texas was 664% last year, higher than any other state. Many payday lenders charge even higher rates.
For comparison, the average interest rate for a new credit card is currently 21%, according to WalletHub.
Though they’re marketed as short term loans, most people do not pay back payday loans in the original timeframe of the loan, which spikes the costs of the loan. Texans usually take more than six months to pay back the loans, Perryman said. That often means they pay interest and fees that exceed the amount of the loan.
A Pew Charitable Trusts report found that consumers in states, including Texas, that offer few consumer protections end up paying four times more for payday loans than consumers in states that have comprehensive regulations on the industry.
Auto title loans often carry somewhat lower interest rates, but borrowers also run the risk of losing their car if they fall behind on loan. Over the last decade, 374,381 vehicles have been repossessed because of title loans.
Looking to the Legislature
Baddour, who has spent years pushing for consumer protections around payday and auto title loans, said there is strong bipartisan support among regular voters for reining in payday and title lenders and putting a cap on the rates they can charge people. But, she said, it feels like a rate cap is “politically impossible” in Austin, largely because of industry lobbying.
“It’s shocking that these kinds of practices are legal in our state. Poll after poll after poll, people come out and say this is wrong, that we need to do something about this,” Baddour said.
While major state action has proven impossible in the past, dozens of cities across Texas have passed local ordinances reining in payday and auto title lending practices, but there are limits to what local governments can do.
With the legislative session around the corner, Baddour said she’s gearing up for both defense and offense. She hopes advocates for more consumer-friendly lending practices will be able to protect the rights of cities to keep their regulatory ordinances – often a target of attack. And she’s hoping that lawmakers will adopt some of the protections cities have already passed to protect all Texas borrowers.
Targeted impacts
For many borrowers, payday and auto title loans are a stop gap used to cover immediate expenses they can’t afford. Because many people aren’t earning a living wage, and housing and other costs are consistently rising, many turn to high-cost loan products to cover a higher-than-usual light bill, buy back-to-school supplies, or pay for a medication.
“They may use one of these loans to get a little extra money in their pocket. And in that moment, it does make a difference. It gives them money. But the problem is that it just makes the problem worse,” she said, by creating a greater financial burden.
Black and Latino communities are disproportionately affected by payday and title loans, due in large part to a long history of racial discrimination in the financial industry. A LendingTree study found counties with higher rates of Black residents were more likely to have payday lending establishments. The lenders are also disproportionately located in lower-income neighborhoods. Researchers at the University of Houston found lenders targeting people of color when advertising payday loans.
Chronic financial insecurity drives people to use the loans. Perryman said at victims of domestic abuse are seven times more likely to take out payday or title loans. Military veterans are also disproportionately in debt to payday and title lenders, Baddour said, even though the federal government caps interest rates for loans going to active servicemembers.
Baddour says there are a growing number of alternatives to payday loans. Multiple national banks have begun offering affordable, small, short term loans. National groups like Capital Good Fund and local nonprofits like Saint Vincent de Paul offer loans and financial literacy programs to help people get out from under payday loans. Many credit unions have also launched affordable, small, short-term loans.
Got a tip? Christopher Connelly is KERA's One Crisis Away Reporter, exploring life on the financial edge. Email Christopher atcconnelly@kera.org.You can follow Christopher on Twitter @hithisischris.
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