With low unemployment rates and high numbers of parents in the workforce, we know that Nebraska families are working hard. However, sometimes hard work is not enough to pay the bills. When these situations arise, payday lenders are there to offer short-term loans. In these transactions, the customer gets cash up front, while the lender holds on to a check from the borrower with the loan amount, plus a fee, due on a certain day—usually payday.
Although all families need access to credit in times of need, payday loans are very expense because of their high interest rates; in 2011 Nebraska borrowers paid $25,531,761 in interest payments for these loans. Because payday lenders are operating here in Nebraska just as they are nationwide, our families are just at risk for the negative effects that using payday lending can have on a family and on the economy.
In Nebraska, the interest rate for payday loans is 459% APR, which drives up the price of the loans if they aren’t paid back in time. Because of the short-term repayment schedule of the loan and the expensive interest attached, borrowers who obtain a payday loan may get caught up in a cycle of continued borrowing called a debt trap. In other words, trying to pay off the loan puts borrowers in a worse financial situation. For example, 90% of repeat loans are taken out soon after the previous loan is paid off, because customers’ resources have been depleted in paying off the previous loan.
Payday loans may be more damaging for families struggling to make ends meet. Research notes that borrowers taking out a payday loan are likely to already be experiencing financial hardship. Paying off payday loans can exacerbate families’ financial situations by depleting households’ disposable incomes. That means that families have less money to pay bills, and can spend less on goods and services. For instance, households that are paying off payday loans are 20% more likely to be receiving food stamps, and 10% less likely to pay child support. In fact, having access to payday loans increases the likelihood that borrowers will file bankruptcy. In short, taking out payday loans can lead to families being more strapped for cash than they were in the first place, and impact both consumer spending and use of public safety net programs.
In addition to being bad for Nebraska’s families, payday lending is bad for our state economy. Nebraska’s economy lost $5,969,555 and roughly 87 jobs in 2011 because the money that the payday lending industry generated was less than what would have been spent into the economy by families had they not had to pay off payday loans.
We need to work toward ensuring that Nebraska families have access to loans that don’t compromise their longer term financial security or negatively impact our state’s economy.