“Payday” loans are usually short-term and for small amounts, but they can cause big problems. Despite their name suggesting a temporary solution for the cash-strapped to stay financially afloat until the next paycheck, these loans often drown borrowers in debt.
The typical payday loan, also called a “cash advance loan,” is for two weeks and $325. But with high fees, that payback amount can become $377 by day 14. When the borrower can’t pay it, the loan is extended with more fees, or more payday loans are issued—a practice called a “loan flip.” When all is done, reports the nonprofit Center for Responsible Lending, that original $325 loan spirals upward into an average cost of $793 and nine “flip” transactions to pay it off.
In recent years, payday lenders have been accused of targeting Social Security beneficiaries, whose monthly checks from Uncle Sam make them especially attractive customers. Many payday lenders cluster around government-subsidized housing largely occupied by seniors, the disabled and others getting federal benefits, according to an analysis by geographer Steven Graves of California State University.
One increasingly common scenario, says consumer advocate Jean Ann Fox of the Consumer Federation of America, is for lenders to arrange for prospective borrowers’ Social Security checks to be direct-deposited into “master” bank accounts that they control. “So they have first dibs on your scarce money, and after they take payment for the loans and theirs fees, they give you the remainder,” Fox says.
Another spin: Borrowers “sign over” electronic access to their existing bank accounts. “So the day your Social Security check is deposited in your bank account,” Fox says, “the payday lender is first in line to pull out the full payment and finance charge … and you lose control” of your benefits. Law prohibits the government from sending Social Security checks directly to lenders. But by establishing relationships with banks, lenders can pressure borrowers to have their Social Security checks deposited directly into those third-party accounts, say consumer advocates.
Steven Schlein, a spokesman who represents the Community Financial Services Association, the trade group of payday lenders, denies that CFSA members do this. “The profit margin is too small on payday loans to be dealing with banks to get access to senior citizens’ [Social Security] direct deposits,” he tells Scam Alert. “It’s not worth the effort.”
Still, the Social Security Administration has “concerns” that some high-interest storefront lenders exploit its beneficiaries by controlling direct deposit payments. The agency is seeking public comment, which could result in changes to how the SSA delivers some benefits. “We anticipate changing our current procedure,” notes SSA spokeswoman Kia S. Green.
Although payday loans are discouraged by consumer protection groups and the Federal Trade Commission for everyone, they can be especially dangerous for Social Security recipients who relinquish control of their direct deposit checks.
“Above all, never, ever sign over your Social Security to a bank account controlled by a loan company,” says Fox. “Talk to your family about lending you money. Ask your other creditors for an extension. Do whatever else you need to do short of getting a payday loan … and giving the lender direct access to your check.”
Her advice: Try to establish an emergency savings fund. “Our data shows that families with $25,000 a year are eight times more likely to take payday loans when they have no savings as compared to having just $500 in savings.”
For more information on the dangers of payday loans, visit www.paydayloaninfo.org.