Why Christians should care about predatory payday lending
By / May 22

When you hear the phrase “payday loans,” what words and ideas come to mind? Helpful? Useful? Timely? Or words with a more negative connotation like harmful, predatory, and immoral? These are some of the responses given by a group of Christians that took part in a recent survey titled American Views on Payday Loans. The survey of one thousand Christians from 27 states was conducted by Lifeway Research and is part of a larger project sponsored by a coalition of faith-based institutions called Faith for Just Lending.

The responses to this and other questions included in the survey were split and have changed to a surprising degree in the last several years. For instance, since 2016 the percentage of respondents who view payday loans as “helpful, useful, and timely” has doubled, and 34% of Christians living in one of these states “have obtained that type of loan themselves” (also doubling since 2016).

The reason for these changes is mixed. Yet, whatever the reason, Christians would be wise to explore what payday loans are and why they can be so morally and materially problematic.

What is a payday loan?

Barrett Duke writes that payday lending “is the term used to describe the practice of lending small amounts of money to people, usually $350 or less, for two-week periods (i.e., until their next payday). In return, the borrower pays interest on the loan when it is due at the end of the loan period.” 

A payday loan, therefore, is a relatively small amount of money (though surely it doesn’t seem small to those being forced to borrow) that is lent to people to see them through to their next payday. As Duke acknowledges, a short-term loan like this “can provide an important service,” but the terms of the loan often lead to more difficulty on the part of the borrower. In fact, the loans are often predatory in nature. And according to the Center for Responsible Lending, there are more than 20,000 payday loan shops providing these loans in the United States today.

Why are they sometimes called predatory?

Payday lending is a business that preys on the most financially vulnerable among us and those who are most in need of help. 

The Center for Responsible Lending calls payday lending a practice akin to “modern-day usury,” a word defined by Merriam-Webster as “an unconscionable or exorbitant rate or amount of interest.” While the authors of this guide recognize that “lending can empower those in need,” they also warn that “lending can be used to exploit those in need.” In too many cases, payday lending is used for the latter. 

Part of what makes payday lending predatory is the outrageous interest rates that are pinned on the loans—rates that are often veiled by the use of unclear financial speak. Duke uses the example of a $350 loan borrowed at 15%. These terms may sound reasonable to a borrower, “except that this [15%] is the two-week rate, not an annual rate. On an annual basis, that 15% two-week loan is actually provided at a 390% annual interest rate,” which is just shy of the “typical payday lender charge [of] 400%.” 

In addition to the high interest rates and unclear language, payday loans are typically eligible for renewal when a borrower is unable to repay the loan in full. In this scenario, a lender will renew the loan, provided that the borrower pays the interest that’s due. Using Duke’s example from above, on a $350 loan borrowed at 15%, a borrower would pay “the $52.50 [in] interest and extend the loan for two more weeks at another 15% interest,” rolling the unpaid total into the new loan. 

And this is a cycle that can continue almost indefinitely. It’s a business model that profits from borrowers’ inability to pay back their loans and traps them in an ongoing cycle, metastasizing their dues and eventually saddling them with a sizable amount of long-term debt. 

Why should Christians care about predatory payday lending?

Christians should care about predatory lending because its practices exploit and take advantage of our neighbors, whom we’ve been commanded to love. In the Old and New Testaments, Scripture is clear that God’s people should not tolerate injustice, should serve and care for those who are marginalized, and where possible, put a stop to the injustices perpetrated against them. 

Finding themselves in a “tough financial hole,” many of our neighbors “have attempted to use payday loans to dig themselves out.” Unfortunately, what they often find with payday loans is not that they’re digging themselves out but digging themselves deeper. For example, “the typical payday borrower pays back $793 for an initial $325 loan” and, on average, “takes out 9 loans a year.” Frequently, these loans lead to more difficulty, more hardship, and more vulnerability for borrowers.

Predatory lending affects not just individuals, but families and entire communities. Cumulatively, it’s an industry that as of 2010 collected $3.5 billion every year in fees alone (i.e., interest and other fees), making it increasingly difficult for borrowers to make ends meet, for families to put food on the table, and for whole communities to thrive. Christians should care about payday lending because it’s a system that fundamentally “undermines the dignity of borrower[s] when [their] failure leads to success and profit for the lender.” Predatory lending is an issue of biblical justice and human dignity.

How have the SBC and ERLC engaged with this issue?

In 2014, messengers to the Southern Baptist Convention’s annual meeting made their opposition to the practice of predatory payday lending clear by passing a resolution that: 

  • “denounce[d] the practice of predatory payday lending as contrary to God’s design for human relationships;” 
  • “urge[d] churches, employers, and other concerned individuals to provide viable solutions for meeting short-term financial needs within their local communities;” 
  • “call[ed] on governing officials to investigate current payday lending abuses in their communities and institute just regulations and policies that terminate the practice of predatory payday lending;” 
  • and “admonish[ed] those who are engaged in the practice of predatory payday lending to consider the great damage they are causing in the lives of vulnerable people and to adopt a just lending model.”

To that end, the ERLC has long sought to shed light on the predatory nature of payday lending. From writing Issue Briefs like the one referenced above to serving as a member of the Faith for Just Lending coalition, the ERLC recognizes “these practices should be regulated to restrict this industry’s ability to prey on the poor among us” and advocates for policies (like South Carolina’s Senate Bill 67) that seek to do just that. Recognizing that predatory lending is an issue that directly concerns human dignity, the ERLC has made the support of payday lending regulations one of its 2023 policy priorities.

What Christians should know about buy now, pay later programs
By / Aug 3

Apple has recently announced that it will include “apple pay later” in Apple Pay when it releases ios 16 this fall. “Apple pay later” is part of a growing trend among companies to offer buy now, pay later payment options. Analysts estimate that at least $100 billion in transactions annually are paid with buy now, pay later, and this amount is predicted to dramatically increase within a few years, with some analysts predicting that this amount could reach between $1 trillion and $4 trillion within a few years. Because buy now, pay later is such a widespread phenomenon, it is important for Christians to be aware of its effects on low-income individuals. 

What is buy now, pay later? 

Buy now, pay later allows consumers to purchase products and pay for them in installments over time. Consumers often pay for items in four installments over several months, rather than paying for items all at once. Buy now, pay later is, essentially, a short-term loan that allows people to purchase items they may not be able to afford if they had to pay for them all at the time of purchase. Buy now, pay later does not cost more than traditional payment methods if consumers make their payments on time. These “loans” can be used to purchase necessities, household items, and technology, among other items. 

However, while credit card companies check credit scores prior to issuing loans, buy now, pay later does not. Thus, these programs are particularly attractive to people who have a low credit score or who do not have a bank account, which are more common among low-income individuals. Studies show that a large percentage of users are young people, who may not have a full understanding of debt and who tend to have lower incomes. 

Why are buy now, pay later programs predatory toward the poor?

Buy now, pay later programs encourage people to spend more money than they otherwise would. A 2020 survey by Cardify.ai, a data firm that tracks consumer spending, found that nearly half of buy now, pay later shoppers increased their spending by 10% to over 40% when they used buy now, pay later instead of a credit card. Another survey of 6,500 adults found that around half of people who use buy now, pay later worry it will lead them to overspend, and 57% of people who have used the program have regretted purchasing an item because it was too expensive. This is particularly troubling in light of the fact that a disproportionate number of low-income individuals use this method of payment. 

While buy now, pay later does not cost more than traditional payment methods up front, it often charges high interest rates and steep fees for people who are late on payments. Unlike credit cards, buy now, pay later is not heavily regulated by the government. Consequently, it is not required to clearly state late fee policies and is not prohibited from issuing interest rates above a certain amount. These exorbitant fees and high interest rates can trap low-income individuals in a cycle of debt. 

Evidence also suggests that people are likely to be late on buy now, pay later payments. A study by CR Research, a market research agency, found that over half of buy now, pay later consumers have fallen behind on a payment. Additionally, a 2020 study by Cornerstone Advisors found that two thirds of consumers who were late for a payment lost track of payments and paid late, despite having the needed money. This high rate of late payments is due in part to the complexity of the service and difficulty of keeping track of required payments. It also points to the reality that many low-income individuals may be forced to take on more debt to make these payments and that these programs are targeted toward young people who disproportionately overdraft. 

Consequently, buy now, pay later is predatory toward the poor because it disproportionately attracts low-income individuals, often involves very steep late fees that are not clearly advertised, and can make keeping track of payments difficult. It can trap low-income individuals in cycles of debt. 

Can buy now, pay later programs be helpful?

If people make careful and informed decisions about when to use buy now, pay later, it could serve as a helpful budgeting tool for those with limited resources. People may be able to purchase items that they wouldn’t otherwise be able to afford. And if buy now, pay later programs reduced their interest rates for late fees and more clearly advertised their late policies, they could be beneficial to low-income individuals. Regulations to ensure that these criteria are met would reduce the risks associated with these programs.

Why should Christians care about this issue? 

Christians should care about the rise in popularity of buy now, pay later programs because Scripture is clear that we are called to seek justice and care for the poor. “And what does the Lord require of you but to do justice, and to love kindness, and to walk humbly with your God?” (Micah 6:8). High interest rates on these loans are unjust and harmful to the poor, so supporting reasonable regulations on their excesses is a way to promote justice in our society. Additionally, Christians are called to love our neighbors. Opposing predatory lending practices is one way that Christians can live out this call to love. 

Scripture strongly condemns usurious and exploitative lending practices. Recognizing the dignity of every person extends to business and financial relationships as well as interpersonal ones. As the Southern Baptist Convention affirms, “God is opposed to those who take advantage of the weak, poor, and vulnerable” and “predatory lending fails to respect the dignity of the person created in the image of God and interferes with human flourishing.” For this reason, Southern Baptists are opposed to predatory lending practices that target financially unstable persons. Any lending practice that intentionally uses and exposes vulnerable individuals is unacceptable and should be strictly regulated by government protections. By being aware of the pitfalls of buy now, pay later, Christians can support policies that are beneficial to their neighbors and more effectively advocate for the poor. 

The ERLC is committed to strongly opposing exploitative lending practices and is working to support regulations and legislation that would stop these practices that are harmful to our neighbors.

Sources:

5 facts about payday lending
By / May 28

Earlier this month the ERLC joined other faith organizations in forming the Faith for Just Lending Coalition. The purpose of the coalition is to raise awareness about families in financial crisis and how high-cost lending negatively impacts them. One industry that frequently takes advantage of the poor and others in financial distress is payday lending. Here are five facts you should know about payday lending:

1. Payday lending (also known as payday loans) is the term used to describe the practice of lending small amounts of money to people, usually $350 or less, for two week periods, i.e., until their next payday. In return the borrower pays interest on the loan when it is due at the end of the loan period.

2. Because they are short-term loans, the borrowers aren’t always aware of the actual rates they are paying. For instance, when the lender offers a $350 loan for 15%, that two-week loan is actually provided at a 390% annual interest rate.

3. If a typical payday loan of $325 is rolled over eight times, the borrower will owe $468 in interest; to fully repay the loan and principal, the borrower will need to pay $793. The rollover of existing borrowers’ loans every two weeks accounts for three-fourths of all payday loan volume, with the typical payday borrower remains in payday loan debt for 212 days of the year.

4. The average payday borrower has nine transactions per year. 90 percent of the payday lending business is generated by borrowers with five or more loans per year, and over 60 percent of business is generated by borrowers with 12 or more loans per year. Loans to non-repeat borrowers account for just two percent of the payday loan volume.

5. Since its inception in the 1990s, the payday lending industry has established more than 22,000 locations that originate an estimated $27 billion in annual loan volume. Nationally, there are more than two payday lending storefronts for every Starbucks location.

Image source: Taber Andrew Bain