Payday loans have long been marketed as a quick and easy way for people to access cash between paychecks. Today, there are about 23,000 payday lenders—twice the number of McDonald’s restaurants in the United States—across the country. While payday lenders target many different Americans, they tend to go after traditionally vulnerable populations. People without a college degree, renters, African Americans, individuals earning less than $40,000 a year, and people who are separated or divorced are the most likely to have a payday loan. And increasingly, many of these payday loan borrowers are young people.
While only about 6 percent of adult Americans have used payday lending in the past five years, the majority of those borrowers are 18 to 24 years old. With the cost of living outpacing inflation, quick loans that do not require a credit score can be an enticing tool to fill personal financial gaps, especially for young people. According to a 2018 CNBC survey, nearly 40 percent of 18- to 21-year-olds and 51 percent of Millennials have considered a payday loan.
Payday loans are a bad deal
Individuals who are most vulnerable to payday lenders are often underbanked or do not have accounts at major financial institutions, leading them to turn to services such as payday lending to build credit. Making matters worse is the extremely predatory element of payday lending: the industry’s astronomical interest rates, which average at least 300 percent or more. High interest rates lead to borrowers being unable to pay off loans and cover their living expenses. Thus, borrowers fall into a debt trap—the payday lending business model that relies on targeting communities that are disproportionately minority or low income. The Consumer Financial Protection Bureau (CFPB) found that 3 out of 4 payday loans go to borrowers who take out 10 or more loans per year.
Ongoing costs, rather than unexpected or emergency expenses, are the primary reason why people resort to payday loans. For Millennials, the generation born between 1981 and 1996, and Generation Z, born in 1997 or later, these ongoing expenses include student loan payments and everyday transportation costs. A Pew Charitable Trusts study from 2012 found that the overwhelming majority of payday loan borrowers—69 percent—first used payday loans for a recurring expense, while only 16 percent of borrowers took out a payday loan for an unexpected expense. Even though studies demonstrate that payday loans were neither designed for nor are effective at helping to pay for recurring expenses, the average borrower is in debt from their payday loans for five months per year from using eight loans that each last 18 days. Ultimately, payday loans cost Americans more than $4 billion per year in fees alone, and payday lending costs a total of $7 billion for 12 million borrowers in the United States every year.
This openly predatory industry is only able to survive because it continues to game Washington’s culture of corruption that allows special interests to benefit at the expense of everyday Americans. Now, with the Trump administration weakening regulations on the industry, payday lenders have a green light to exploit borrowers and have set their sights on a new target: debt-burdened young people.
Young people already face an unprecedented debt crisis
Young people today are experiencing more financial instability than any other generation. A major contributor to young people’s financial difficulties is the student loan debt crisis. From 1998 to 2016, the number of households with student loan debt doubled. An estimated one-third of all adults ages 25 to 34 have a student loan, which is the primary source of debt for members of Generation Z. While many members of Generation Z are not yet old enough to attend college and incur student loan debt, they experience financial stress covering basic expenses such as food and transportation to work and also worry about future costs of higher education. A recent Northwestern Mutual study reported that Millennials have an average of $27,900 in debt, and members of Generation Z average hold an average of $14,700 in debt. Today, young workers with debt and a college degree make the same amount as workers without a college degree did in 1989, and Millennials make 43 percent less than what Gen Xers, born between 1965 and 1980, made in 1995.
For the first time in history, young Americans who graduate college with student debt have negative net wealth. Millennials only have half of the net wealth that Baby Boomers had at the same age. These statistics are even worse for young African Americans Millennials: Between 2013 and 2016, homeownership, median net wealth, and the percentage of this cohort saving for retirement all decreased. These factors, along with the fact that 61 percent of Millennials are unable to pay their expenses for three months compared with 52 percent of the general public, show how prevalent financial instability is for young people. This percentage increases for people of color, with 65 percent of Latinx young adults and 73 percent of Black young adults unable to cover expenses for a three-month period. This is especially troubling given that Millennials and Generation Z are the most diverse generations in U.S. history, with young people of color making up the majority of both groups.
Payday lenders are given free reign by the Trump administration
Even as young people are increasingly falling victim to payday lenders, the Trump administration is making it easier for this predatory industry to continue to operate. In February 2019, the Trump administration’s CFPB proposed an end to a rule that protects borrowers from loans with interest rates of 400 percent or more. The rules, conceived during the Obama administration and imposed in 2017, required payday lenders to determine whether a borrower could repay the loan while still affording basic expenses. However, the Trump administration’s actions scuttled those safeguards. In 2018, acting CFPB Director Mick Mulvaney sided with the payday industry groups suing the agency to stop these rules by requesting that implementation be delayed until the lawsuit is decided. In June 2019, the payday lending industry held its annual convention at President Donald Trump’s National Doral hotel for the first time, celebrating the potential end of the rules that were meant to protect its customers. The fate of the rules will likely be decided in spring of 2020. If the decision is in the favor of the payday lending industry, it will be one of the most brazen examples of pay to play under the Trump administration.
Payday lenders are focusing on young people
To no surprise, lenders are taking advantage of young people’s technology usage to increase the likelihood that they will use their services. Young people are the most likely to use apps for their finances: A 2017 survey found that 48 percent of respondents ages 18 to 24 and 35 percent of respondents ages 25 to 34 use mobile banking apps once a week or more. With so many young people turning to popular apps and streaming sites such as Snapchat and Hulu, it is no wonder that a new app-based short-term loan service called Earnin has focused its advertisements on this target-rich market.
Earnin is a smartphone app that gives people access to money they have earned before their payday, with the option to “tip”—a euphemism for paying what is essentially an interest fee, although it is not required—on the app. Earnin is also sometimes referred to as an early wage access provider, allowing access to earned wages between biweekly paychecks all while apparently avoiding typical lending regulations. These regulations include standards set in the Truth in Lending Act, which requires lenders to publish their interest rates.
Earnin reels in young people with advertisements that promise, “Get paid the instant you leave work.” While Earnin does not collect mandatory interest rates like a traditional payday lender, it does rely on the aforementioned tips, which has resulted in the company receiving pressure from regulators who are concerned that Earnin has operated as an illegal payday lender. The tips do not appear much different from interest rates on a traditional payday loan, reportedly sometimes soaring to $14 on a $100 loan. In fact, the app disabled a feature that was available for a short time in New York—one of 16 states and the District of Columbia that outlaws payday lenders—that issued as much as 10 times more in loans to users who voluntarily tipped compared with those who did not.
Experts on banking law agree that Earnin is a lender trying to pretend that it is not, describing the company’s offering as “a loan but we don’t want to be regulated as a loan.” Furthermore, Earnin has been accused of skirting lender regulations, and the company itself has stated that it is exempt from a 2017 federal rule on payday lending as well as the Truth in Lending Act.
Earnin is being investigated by the New York Department of Financial Services in a probe backed by 10 other state banking regulators and Puerto Rico. There is also a current class action lawsuit against Earnin in California accusing the company of violating federal lending laws as an unlicensed lender. As of December 2019, the lawsuit is pending in the U.S. District Court for the Northern District of California. While the company has not publicly commented on the ongoing litigation, Earnin’s website claims that it is not a payday loan app. Earnin has also stated to “NBC News” that they “expect and welcome conversations with regulators about our business and how the community works.”
Young people today face significant financial difficulties compared with previous generations, with problems paying for basic expenses and student loans among the top factors driving financial strain. Payday loans can be appealing as a seemingly manageable and easy way to make ends meet between paychecks. However, considering that most payday loans go to borrowers who take out multiple payday loans per year, these loans are the opposite of a quick problem solver.
Meanwhile, the Trump administration has thrown the door wide open for this predatory industry to target the most vulnerable. Just recently, some of the top representatives from the payday lending industry reportedly stated that donating to President Trump is the best way to gain influence and avoid regulations. This pay-to-play mentality is perpetuated by Washington’s lack of strong safeguards against ethics violations. Reforms such as banning lobbyists from fundraising for politicians and strengthening lobbying laws would help protect Americans from becoming victims of Washington’s culture of corruption. The public needs both substantive and structural reforms to reign in and change the system. Reducing payday lenders’ influence over politicians and policymaking is the best way to ensure that young people and other vulnerable populations are not harmed by predatory borrowing practices.
Abbey Meller is a research assistant for Democracy and Government Reform at the Center for American Progress.
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