predatory payday ledning: today's debt trap
Part three: engage
By Katie Thompson
[The following is an excerpt from an upcoming book on opportunity.]
Claudette Humphrey thought she was being responsible. A single mother who had relied on her family for support in the past, she was tired of going to them for help. When a $500 car payment came up, she decided she would do the responsible thing and take out a loan to cover the expense.
She received a postcard in the mail about payday loans that offered $100 on the spot, with the possibility of eligibility for more. The payment would be due in two weeks. Humphrey had a bachelor’s degree and a stable job, and the piece of mail said that all that was needed was proof of at least $800 income a month and a checking account.
“I thought wow, this great thing happened to show up at the perfect time,” she said. “I thought finally I’ll be able to solve my own problem and not have to ask my parents or sister for help.”
When she walked into the storefront in Kansas City with her pay stubs and bank statement, the woman at the counter told her she actually qualified for $500. Humphrey was thrilled – this meant that she could pay off her full car payment at once, and even have a little left over to put into the bank in case anything else came up.
“It took about 15 minutes,” she said. “It was so quick and easy.”
Little did she know that this small, short-term loan – a payday loan – would cast her into a spiral of debt and anxiety for several years. A typical payday loan is a two-week, small dollar loan, usually under $500, with extraordinarily high interest rates attached. On average these loans have an annual interest rate between 391 and 521 percent.
When she went back to the store two weeks later, Humphrey quickly realized she was in trouble. Her $500 loan had amassed $75 in interest and the store expected her to pay the full $575 back immediately.
“That’s when it hit me, I couldn’t afford to just walk out of there without $575,” she said. “They explained right then and there that I could just take out another loan for $500 to cover the previous one.”
She did it.
“I was in these two loans for about a year, and by the end of it, I spent over $3,000 in fees before I realized how deep I was,” she said. “That’s how I got caught in the debt trap that it so totally and absolutely is.”
Humphrey’s story is not unique. Each year 12 million Americans take out a payday loan, spending more than seven billion dollars in the process. Not surprisingly, many payday lenders prey upon the poor. There are over 22,000 payday lending locations in the United States, making it a $27 billion dollar industry. For every Starbucks location in the U.S., there are two payday lending storefronts, and they are disproportionately located in low-income neighborhoods.
The typical payday borrower is in debt for 212 days of the year. Over 90 percent of the payday lending business is generated by borrowers with five or more loans a year, the Center for Responsible Lending reported.
“When people are making exorbitant profit off of people who are in a desperate situation and vulnerable, it should be known,” Stephen Reeves, associate coordinator of partnerships and advocacy at the Cooperative Baptist Fellowship, said. “When you look at this issue and see the poor state of the law, and how the industry makes its money, it leads to righteous indignation.”
Reeves began working on payday lending reform over six years ago when he was legislative council and director of public policy at the Texas Baptists Christian Life Commission. In his current role, Reeves coordinates advocacy efforts with 1,800 churches from Virginia to Texas and engages the issue of payday lending at the federal level.
“It’s really a fortunate perfect storm as far as new national opportunity on the issue itself,” Reeves said. “This really bridges divides, you can see agreement from Republicans and Democrats. We want to find bridge builders across theological, political, and racial lines.”
Since finding herself in the battle to get out of several payday loans, Claudette Humphrey is not only passionate about telling her story, but about helping those who are now in the situation she found herself in years ago get out of the trap. She lives and works in Kansas City, Kansas, where there is a 395 percent annual percentage rate (APR) limit.
In 2012, Humphrey helped to launch Catholic Charities’ Kansas Loan Pool Project, a program that offers lower-interest loans to borrowers struggling to get out of payday loans.
“I know what it feels like to be at that place, so I thought I could do something pretty powerful and meaningful here,” Humphrey, the Kansas Loan Pool Project Director, said. “It’s pretty amazing when you can give a voice to something you truly understand because you lived it.”
The Kansas Loan Pool Project (KLPP), which partners with Sunflower Bank, offers loans of up to $2000 at 6 percent interest for a 12 to 18 month period depending on the size of the loan. The client’s total payday loan debt must be less than $2000 so that the KLPP can get the client fully out of the debt, not just part way.
Fortunately payday lending has recently been the focus of new legislative efforts, and Humphrey recognizes the urgent need for national reform because there is only so much that can be accomplished at the state level. In the meantime, she will continue to tell her story to churches, schools, elected officials, and her neighbors who are currently facing the same feelings of shame and guilt for being trapped in a payday loan that she once felt.
“My faith is what drives me every morning when I wake up, to continue to do this work,” she said. “I know this is what God intended for me to do with my life, to give a voice to the marginalized of the world, to fight for those who live in poverty, who have less than, and therefore feel like they’re less than.”