Places With the Most Payday Lenders Tend to Be Low-Income Communities

The coronavirus pandemic has left millions of Americans unemployed and financially insecure. When consumers can’t make ends meet and need a quick fix for their financial problems, they may be tempted to turn to predatory loans with high APRs and short repayment periods.

LendingTree researchers have found that payday and alternative banking lenders are more prevalent in lower-income communities, targeting consumers who are less likely to be able to repay such loans. Black communities can also be disproportionately affected by payday lenders.

Key findings

• Payday lenders are more common in the South. The top 10 counties with the highest amount of payday lending establishments per 100,000 residents are all in the South. Mississippi counties take the top two spots, while Louisiana has five in the top 10.
• Payday lenders are more likely to be in poorer communities than in wealthier ones. The average income for the counties with the lowest per capita rates of payday lending establishments is $78,309, but that figure for the top 10 drops to $47,609.
• Payday lenders are more likely to be found in counties with higher rates of Black residents. The 10 counties with the highest rates of payday lending establishments average a Black population of 20.93%, but that rate for the bottom 10 is 8.73%.
• The Northeast tends to have the least payday lenders per capita. Six of the counties with the lowest rate of payday lending establishments are in the Northeast.
• Wealthier counties in Southern states tend not to have many payday lenders. Loudoun County, Va., which has an average household income of $139,915, had just three payday lending establishments despite a population of 406,850. There are some exceptions, though. Madison County, Miss., ranked 16th with 14 payday lenders and a household income of just under $76,000.

Where payday lenders operate at higher rates

Payday lenders and alternative banking services help consumers who are struggling to pay their bills by offering fast funding when needed, typically without a credit check. However, these loans often come with triple-digit APRs and short repayment periods, which makes them difficult to repay — especially for people who didn’t have the money in the first place. When borrowers can’t pay their existing payday loan once the balance is due, they can opt to “roll over” their loan into a new payday loan, incurring new fees and interest, only to become trapped in a cycle of debt.

LendingTree data found that payday lenders are more prevalent in vulnerable communities, which suggests these types of lenders target consumers who are least likely able to repay them:

Payday lenders are more widespread in lower-income communities

Payday lenders set up shop among borrowers who can least afford exorbitant APRs, our study found. There’s a clear correlation between areas with lower household incomes and areas with higher rates of payday lenders per capita:

The primary reason why payday loans and similar cash advance loans are so dangerous in lower-income communities is that the majority of the borrowers can’t pay off the loan by the time it’s due. For every five payday loans taken out, four of them will be rolled over into a new payday loan within two weeks, according to the latest data from the Consumer Financial Protection Bureau.

Rolling over a payday loan will incur more fees. The CFPB uses this example: A typical two-week loan for $300 may come with a $45 borrowing fee, which equates to about a 400% APR. If the borrower rolls over their loan, they may be charged a second $45 fee on the same amount of money, which means that the borrower is paying $90 to borrow $300 for four weeks. If a loan is rolled over enough times, the borrower could end up paying more in fees than the loan was worth.

For low-income borrowers, this poses an issue, as 1 in 5 five payday loan borrowers end up in default, according to the CFPB. This means that the lender can send the debt to collections, and the borrower’s wages may be garnished, depending on a court order. So, consumers with the lowest incomes end up suffering the most.

Black communities have a higher proportion of payday lenders

Payday lenders and alternative banking lenders are also disproportionately located in Black neighborhoods, our study found. The proportion of Black residents in the top 10 counties with the most payday lenders is more than double that of the Black population in the bottom 10 counties with the fewest payday lenders. In fact, 20.93% of the population in those communities with the highest rates of payday lenders is Black, but that rate for the counties with the least payday lenders falls to 8.73%.

The prevalence of predatory lenders within these communities means that Black Americans can be more likely to become trapped in a cycle of debt through payday loans that are rolled over repeatedly.

A recent LendingTree study found that despite advancements like lower unemployment and higher incomes, Black Americans see less economic prosperity than Americans as a whole. Predatory lending has the potential to hold consumers back from achieving their financial goals, and our data shows that Black Americans have more predatory lenders in their backyards.

Payday lending is more common in states with fewer regulations

The laws surrounding payday lending vary by state, which may contribute to why some may have higher rates of payday lenders. A February 2020 report from the National Consumer Law Center shows which states have APR caps on small-dollar lending. For instance, California, Colorado, New Mexico and Ohio recently imposed or reduced APR caps to protect consumers from paying unrestricted interest rates. Other states don’t have APR caps on small-dollar loans.

Below is a list of states with no APR caps on $500 loans with a six-month repayment period, along with how many counties within these states have a high proportion of predatory lenders:

Even among states that do impose APR caps, they may not do too much good: Mississippi has a 305% APR cap, with six counties in the top 25 when it comes to prevalence of payday lenders, our data found. Louisiana, with an APR cap of 85%, has seven counties in the top 25. Some other states have triple-digit APR caps, like New Mexico (175%) and Ohio (145%).

While there’s no federal APR cap on small-dollar lending, the concept isn’t far-fetched. The Veterans and Consumers Fair Credit Act, a House bill that was introduced in late 2019, would set a national maximum of 36% APR, including fees, on consumer loans. Consumer advocacy groups like the NCLC and the Center for Responsible Lending have also promoted a national 36% APR cap.

Economic instability due to COVID-19 may increase need for payday lending

The coronavirus pandemic has put a strain on many Americans who are unemployed, furloughed and generally just financially unstable. Reports from NPR and The Wall Street Journal found that predatory lenders are taking advantage of the economic instability caused by the coronavirus pandemic to advertise their products and package predatory loans as relief.

At the same time, the CFPB rolled back protections that required lenders to ensure a potential borrower would be able to repay a loan before issuing it. This may make it easier for people who can’t afford small-dollar loans to secure such funding. And though LendingTree researchers focused on payday loan establishments within counties, the growing presence of online payday lending operations has made it easier for borrowers to find these loans outside of storefronts.

As consumers turn to payday lending to tide themselves over during the coronavirus pandemic, it’s more important than ever to recognize some of the signs of predatory lending:

• Triple-digit APRs
• Short repayment periods
• High-risk collateral (like a car title loan)
• Lack of transparency
• Loan flipping, or rolling over one high-cost loan into another

Methodology

To find the counties with the most payday lenders, we compared the number of payday loan establishments to the population. (We only included counties that had payday lenders in the final analysis). We ranked the counties by rates of payday lenders per 100,000 residents. We also compared this rate to household income and population demographics. All data, which is from 2018, comes from the Census Bureau.