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Payday loans and the community

Do Payday Lenders Target the Poor
Photo by Dan Kitwood/Getty Images

Payday lenders prey on communities that are economically vulnerable, endangering the wellbeing of those whole communities, not only their borrowers.

That has been the finding of a recent report from the Howard University Center on Riches and Race, which analyzed payday loan practices in Louisiana, Alabama, Florida and Mississippi. The writers contend that the negative economic effect of the generally small-dollar, high-interest payday loans goes past the individual borrowers.

"Payday lenders drain income from the area disposable income base and, thus, negatively impact the neighborhood economy," the report said.

It went on to describe that borrowers whose disposable income is used to cover fees and loan interest are not able to purchase goods and services from local businesses, adding an economical hardship.

Generally speaking, the bulk of payday loan businesses were found in economically vulnerable areas. The report states:

According to the location of these lenders, it's clear they target minority and low- to mid-income groups, mostly in areas that are populated that are exceptionally diverse. These regions will without a doubt be pushed into poverty, if this tendency continues.

While the payday loan industry asserts it is filling a need for small-scale, short-term loans, the Howard University report discovered that the net economic impact is mostly negative. It recommends the government take steps to regulate the sector before more communities endure.

"Since our findings illustrate that payday lenders strip money from their customers and also the decreased spending on additional goods and services strip the market of prospective gains, it is in the best interest of the entire state for the authorities to take actions to restrict these predatory practices and in exactly the same time educate people concerning the dangers of payday loans," the report said.

The Consumer Financial Protection Bureau is expected soon to release a first draft of national rules regulating the payday advance industry.

What's the appropriate price for a small, short term loan? Watch this video on one that does not charge anything, then explore our options center for ideas on the best ways to develop credit and get affordable loans.