Have you ever wondered why Texas is home to so many payday lenders? With new locations for ACE Cash Express, Speedy Cash, and more popping up in cities across the state, it should come as no surprise that Texas is widely considered to be the “Wild West” of the payday loan industry. This practice has led many Texans to have their monthly budgets swallowed whole by predatory loans. The dangers of Texas payday loans are not always evident until you’ve signed on the dotted line, and it’s too late.
What Are Payday Loans and Installment Loans
There are two primary types of loans for payday lenders. The first is a traditional payday loan. Payday loans are small-dollar loans – often valued at $1,000 or less – that are designed to help people bridge the gap between paychecks. If someone finds themselves in a financial emergency, payday loans allow them to borrow the money needed to pay off this debt, garnishing their next paycheck in the process. The appeal of a payday loan is speed. Unlike banks and credit unions, payday loans do not require the originator to verify a borrower’s ability to pay back the loan before releasing the funds. This approach effectively makes the borrower’s ability to repay the loan a nonfactor and allows many people to take on additional debt they cannot afford.
Installment loans, like payday loans, are targeted towards borrowers who lack geographic or financial access to credit union and bank loans. Much like a traditional personal loan, installment loans feature higher amounts and an extended repayment period – a recent Bloomberg article suggested that the terms on most installment loans ranged from 4 to 60 months while the principal amounts could get as high as $10,000 – but these loans can also be subject to three-figure interest rates for borrowers. Payday lenders have invested heavily in online installment loans in recent years, resulting in a near-$50 billion dollars industry as of 2018.
In the case of both payday loans and installment loans, aggressive interest rates have caused many families to fall into long-term debt cycles. Let’s say you take out a small loan with the intention of paying it back during the next pay period. However, thanks to the high-interest rate and fees associated with these loans, you find that you are unable to repay the amount in full by your next pay period. You pay the minimum required amount and extend the deadline another two weeks with the lender – for a small fee, of course. Over time, the interest on this loan continues to grow, and you struggle to pay down the principal balance, and before long, you owe far more than the initial balance of the loan.
What Makes Texas Different
One does not become known as the “Wild West” of payday lending by facing the same challenges as everyone else. In 2015, Texas led the nation with 23.1% of all payday lenders in the country; California finished in second place with 12%. A more recent study found that 8% of all Texans had taken out a payday loan, compared to the national average of 5.5%. Texas is even helping shape the national conversation around payday loans; as noted by the Credit Union National Association, ongoing efforts by the Consumer Financial Protection Bureau to change the requirements surrounding payday loan eligibility are currently on pause, pending a court order from the Texas court systems.
Why is it that Texas has proven itself to be such fertile ground for the payday lending industry? A big part of this is government regulation. While the state constitution caps lenders from charging an interest rate above 10%, payday lenders in Texas can take advantage of language related to the Credit Services Organization Act that allows them to register as Credit Access Businesses (or CABs). This change in categorization removes the constitutional restrictions placed on the organization; instead of underwriting an installment loan themselves, payday lenders instead serve as a broker between a borrower and a lender. This way, the underwriter remains below the 10% threshold, and the payday lender charges the borrower a premium for access to these funds.
This loophole can lead to astronomical rates for local borrowers. According to the Texas Fair Lending Alliance, the average two-week payday loan features an annual percentage rate (APR) of 574%. And worse, since Texas is home to the country’s second-largest veteran population, these loans tend to affect military veterans and their families disproportionately. A study released by Texas Appleseed in March 2019 found that military veterans are six times more likely than the general populace to take out a payday or auto title loan. 54% of the veterans surveyed also went on to take out multiple payday loans a year to keep their finances straight, while 77% admitted that payday loans were making it difficult for the veterans to pay their other bills.
Payday Loan Alternatives
For those considering a payday loan in Texas, there is good news. No matter your credit score, there are several Texas-based non-profits and financial institutions that can help you secure a short-term loan at favorable rates. Many of these organizations have grown as a direct response to payday loans; their products and services are designed to help people avoid the debt cycle altogether and make financial decisions that benefit them in both the short-term and the long-run.
Personal Loans. For those with the luxury of time, choosing to go with an established credit union or bank for a personal loan is undoubtedly the preferred option. Not only are the interest rates capped on these loans for the reasons outlined above, but most community-based organizations will also work with you to decide the right product or services for your financial needs. In some cases, the financial advisors at these financial institutions will even point you in the direction of a competing organization or non-profit if they feel it is in your best interest as a member.
Payday Alternative Loans. For people worried that their credit score might prevent them from securing a traditional personal loan, many credit unions offer a product specifically targeted to help individuals break free from the debt cycle associated with payday loans. Payday Alternative Loans are small-dollar loans that allow local financial institutions like Texas Bridge Credit Union in Corpus Christi or River City Federal Credit Union in San Antonio to offer the convenience of a payday loan – zero credit checks and short terms – without the predatory rates associated with the lenders.
Community Loan Centers. Often highlighted as an alternative to payday loans, the products and services offered by the Community Loan Center network in Texas can be an excellent resource for those looking to replace their high-interest loans with something a bit more set in their rates. A program of Business & Community Lenders - itself a 501(c)3 non-profit focused on building stronger communities through economic development - the Community Loan Center network has options throughout the state for those looking for a short-term loan at affordable rates.
What Can You Do If Payday Lenders Impact You
If you’re one of the millions of Texans already impacted by payday loans, there are options available to you and your family. Whether you need help managing your monthly payments or want to get in the fight against predatory lending, there are a variety of Texas organizations that can help you enact positive change in this industry. Here are just a few opportunities to consider.
Work with a Credit Counselor. If you feel like you’re working overtime to manage a bad loan, a good place to start is a credit counselor. Credit counselors offer financial planning – often for a flat fee – and work with borrowers to help them organize their payments and carve a path out of debt. While many people start by searching online for credit counselors, you might also consider contacting organizations like the National Foundation for Credit Counseling for referrals near you. You can also visit the Federal Trade Commission website for more information on how to properly vet a credit counselor in your community.
Consolidate Your Payday Loan with a Respectable Lender. One of the reasons people turn to payday lenders is their speed. If you’re facing a financial emergency, you may not have time to go through a traditional approval process with a bank or credit union. But once the money has been issued and the interest starts to grow, there’s no reason not to shop your local financial institutions and look for alternative payment plans. Securing a loan with a credit union might allow you to buy out your payday loan at a lower interest rate, allowing you to escape that ugly debt cycle once and for all.
Get Involved with Payday Loan Reform. Organizations like Texas Appleseed and the Texas Fair Lending Alliance have made it their mission to reform the payday lending process for the State of Texas. If you can provide support to these organizations – either with donations or the pro-bono use of your legal and financial expertise – now is a great time to get involved in the fight for more ethical lending practices. The Texas Fair Lending Alliance even has a section on its website for payday loan borrowers to submit their stories, which the organization will use to help promote their cause throughout the state.