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The Predatory Trap Of Payday Loans: How The Banking System Exploits The Working Poor

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For millions of Americans, living paycheck to paycheck is a harsh reality. They struggle to make ends meet, pay their bills, and save for the future. They face constant financial stress and uncertainty, especially when unexpected expenses arise, such as medical emergencies, car repairs, or home maintenance. They have little or no access to conventional credit, such as bank loans, credit cards, or overdrafts. They are often excluded from the mainstream financial system, which is designed to serve the wealthy and the middle class.

Banking System Profits Off The Poor

The banking system, after decades of deregulation and consolidation, has become more predatory and profitable than ever. It has raised fees on overdrafts, bounced checks, ATM withdrawals, and account maintenance, making billions of dollars off the poor. According to a report by the Center for Responsible Lending, banks collected $11.68 billion in overdraft fees in 2020, with 9% of account holders paying 84% of the fees. These fees disproportionately affect low-income, people of color, and young people, who are more likely to have low or irregular incomes, live in underbanked areas.

The poor are the ones paying these fees, and the consequences are devastating. They fall further into debt, lose their savings, and damage their credit scores. They are often forced to close their bank accounts or have them shut down by the banks. According to the Federal Deposit Insurance Corporation (FDIC), 7.1 million households in the U.S. were unbanked in 2020, meaning they had no checking or savings account. Another 24.2 million households were underbanked, meaning they had a bank account but also used alternative financial services, such as payday loans, check cashing, or pawn shops.

Without a bank account, the working poor have few options to access credit. They are forced to use credit cards, which charge high interest rates, fees, and penalties. They often max out their credit cards, miss their payments, and incur late fees and over-limit fees. They end up owing more than they can afford, and their credit cards are canceled by the banks. They are trapped in a cycle of debt that is hard to escape.

Payday Loan Predatory Policies

This is where the bottom feeders come in: the payday loan predators. Payday loans are short-term, small-dollar loans that are due to be repaid by the next payday, usually within two to four weeks. They are marketed as a quick and easy way to get cash in an emergency, but they are actually a trap that exploits the desperation and vulnerability of the working poor. Payday loans charge exorbitant interest rates, fees, and penalties, often exceeding 400% annual percentage rate (APR). They also require access to the borrower’s bank account or a postdated check as collateral, giving them the power to withdraw money directly from the borrower’s account or cash the check on the due date.

Payday loans are designed to be unaffordable and unpayable. They do not consider the borrower’s ability to repay, income, expenses, or credit history. They only care about the borrower’s ability to provide collateral and pay fees. They often trap the borrower in a cycle of debt, where they have to take out new loans to pay off old ones, or roll over their loans by paying only the fees and extending the due date. According to the Consumer Financial Protection Bureau (CFPB), 80% of payday loans are rolled over or followed by another loan within 14 days, and the average payday loan borrower takes out 10 loans per year.

Payday loans are not only costly, but also harmful. They cause financial distress, emotional stress, and health problems for the borrowers. They lead to overdraft fees, bounced checks, bank account closures, credit card defaults, bankruptcy, and foreclosure. They also contribute to social problems, such as family breakdown, domestic violence, crime, and suicide. According to a study by the Center for Community Economic Development, payday lending drains $774 million in fees from low-income communities every year.

Politics & Corruption

However, despite the widespread opposition and regulation, payday lending persists and thrives in the U.S. Why? The answer is simple: money and politics. According to the Center for Responsive Politics, the payday loan industry contributed $15.3 million to federal candidates and committees in the 2020 election cycle, with 69% going to Republicans and 31% going to Democrats . The industry also spent $6.7 million on federal lobbying in 2020, with the top recipients being the CFPB, the Treasury Department, and the House Financial Services Committee.

The payday loan system is an integral part of the banking system, and both systems are intertwined and interdependent and backed by both major parties. They work together to exploit and oppress the working poor, who have no voice and no choice in the matter. They are the victims of a predatory and corrupt system that is rigged against them, that system is capitalism. Working people will need a banking system that will also support the working poor with rules that aren’t governed by the tenements of capitalism, tying it to a living wage and rent control. This will require a new working class political party that is willing to take on the banks and the payday loans industry as a whole. 

We Demand:

  • Immediate cap on interest rates
  • End of overdraft fees
  • Public ownership of the banking system including the payday loan industry 
  • For a banking system that supports a stable life for the working poor
  • For a workers’ party that can guarantee full employment, a living wage and rent control

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