Payday Loans Trap Social Security Recipients in Debt
In Spanish | The downturn in the economy could push more Social Security recipients to take out high-interest payday loans, risking getting caught in an ever-increasing cycle of debt.
A payday loan is typically a short-term loan of less than $ 500 typically intended for low-income people. The fees typically range from $ 10 to $ 30 for every $ 100 borrowed. If you’ve borrowed $ 300, for example, you’ll owe between $ 30 and $ 90 in fees. Borrowers write a check for the loan amount, plus fees, to the lender dated their next payday. The lender cashes the check on the borrower’s payday and collects their principal and fees.
If you collect Social Security Administration (SSA) benefits and can verify your payments, you are usually eligible for a payday loan. Payday lenders welcome Social Security beneficiaries because, unlike part-time workers, their payments are stable and reliable. And for many people, including Social Security recipients, loans are quick and easy to obtain.
Convenience at a high cost
The convenience of payday loans comes at a high cost. According to the Consumer Financial Protection Bureau (CFPB), a typical two-week payday loan with a fee of $ 15 per $ 100 borrowed equates to an annual percentage rate (APR) of nearly 400%. In contrast, the typical credit card has an APR of around 16%, depending on Bankrate.com.
Some economists argue that payday loans can be a reasonable solution to short-term cash shortages, if you pay them off quickly. “The problem with these loans is when you pay off a loan and you don’t have enough money in the next pay period,” says Kimberly Blanton, who writes the Squared Away Blog for the Center for Retirement Research at Boston College. “And so you borrow more. “
It is an expensive strategy. If in two weeks you can’t afford to pay off that $ 300 payday loan with a $ 45 fee, the borrower might suggest that you just pay the fee, rather than the loan principal. But on the next payday, you’ll still owe $ 45 in fees plus principal, meaning you would now have paid $ 90 in just one month to borrow $ 300.
“The industry says, ‘Look, borrowers can fix their cars and go to work so they can keep their jobs,” says Haydar Kurban, professor of economics at Howard University. “The problem is someone who takes out 10, 12 loans per And the payday loan strategy is to land borrowers multiple times. “
For beneficiaries of Supplemental Security Income (SSI), a program run by SSA to support some people with little or no income, there is an additional danger. A loan does not reduce your SSI benefit, but any funds you borrow and don’t spend count towards the $ 2,000 resource limit for an individual (or $ 3,000 for a couple) the following month. If the value of your resources exceeds the allowed limit at the start of the month, you cannot receive SSI for that month.