The practice of predatory lending – which imposes sky-high interest rates on low-income workers and vulnerable communities – often pulls individuals, families, and small businesses into a debt trap from which it can be nearly impossible to emerge.
In the United States, the average annual percentage rate paid on a payday loan is 391%. But payday loans are only one of the many mechanisms that impose triple-digit interest rates on low-income and vulnerable communities. High-cost loans that collateralize a car title, fixed pensions, or expected tax returns can be equally as damaging. These loans frequently cause a cycle of debt from which it can be nearly impossible for individuals, families, and small businesses to emerge. And, while the new Consumer Financial Protection Bureau (CFPB) rules are helpful, they only address certain types of predatory products and are not expansive enough.
Similarly, student loan debt and predatory for-profit college practices start young workers in a debt trap from which they often cannot escape. In the last few years, student loans have accelerated past all other types of loan debt. Student loan borrowers who attend for-profit colleges are more likely to leave school before completing their studies, which is a leading cause of loan default – and some of these for-profit colleges, like Trump University, have been accused of actually defrauding their students.
Payday loans, many of which vary in their interest rate from 200 to 600 percent, have already driven too many people deeply into the debt trap, a disproportionate number of whom are people of color.”
These predatory debt traps have a disproportionate impact on communities of color. Minority students and women are especially affected by student loan debt and, in particular, for-profit colleges. In 2014, the Center for Responsible Lending laid out this argument in a report, stating: “As our data demonstrate, attendees of for-profit colleges are more likely to take on debt for their education. Because many of these students will not complete their education or – if they do graduate – will have poor employment prospects, default is more likely. Because students of color disproportionately attend for-profit colleges, borrow more, and have lower graduation rates, they may be at greater risk and experience disproportionate harm.”
Low-income workers and students are pulled into these predatory debt traps, and if they default on a loan, there is an entire industry of debt buyers who turn a profit from their long climb out of debt. The Urban Institute estimates that 77 million Americans currently have credit reports that show accounts in collection. And when that debt is sold to a debt buyer, the situation becomes even worse. Debt buyers purchase old debts from creditors for pennies on the dollar and then hire debt collectors or attorneys to force consumers to pay up, often by suing them in court. Recent enforcement actions by state and federal regulators show widespread abuse and improper lawsuits brought to try to collect old debt. Even worse, with only 6% of debt sold with documentation, a consumer can be sued for debt that may not even be theirs. And abusive debt collection practices tend to have a disproportionate impact on low-income communities and communities of color.