Minimum Wage Hike Would Decrease Abundance of Payday LoansBy J.J. Cameron
Payday Loan Writer
As Americanprogress.org points out, the current debate within Congress to raise the federal minimum wage from $5.15 to $7.25 would have a far-reaching impact. Those that have been relying on faxless payday loans, for example, may have an opportunity to make payments on their own.
The recent explosion of the payday loan industry has mostly impacted low-wage families. Thanks to high fees and exorbitant interest rates, these cash advances often trap many low-wage earners and their loved ones. Now, raising the minimum wage could increase families’ ability to save and help put a dent in their debt on their own. In other words:
Rethinking the low-wage structure is not just about allowing families to better afford life’s essentials; it’s also about protecting them from a debt trap, via online payday loans, that could forever hold them back from achieving the American dream.
The payday loan industry has exploded in the last decade, reporting including $6 billion in interest rates and fees in 2000. Because of the high-risk terms, borrowers often get caught in a vicious cycle of chronic debt. When they cannot afford to pay back the fees plus the principle at the end of the two week period, borrowers are forced to pay another high fee to roll over the payday loan for an additional two weeks or take out another loan to pay off the first loan.
With such high-cost terms, repeat use of fast payday loans is often a debt trap for many families. A study published by North Carolina’s Center for Responsible Lending (CRL) finds that 91% of all payday loans are made to repeat borrowers who take out five or more payday loans per year. CRL further estimates that nearly five million borrowers are caught in this cycle of chronic repeat borrowing every year, costing low to moderate income families $3.4 billion in high fees and interest rates.
Even a small increase in wages may provide the cushion families need to stay away from high-interest faxless payday loan lenders. The current bill raises the minimum wage from $5.15 to $7.25 an hour, giving a worker an additional $4,200 over the course of a year. Assuming a family puts a percentage of this increase in income towards outstanding payday loan debt, even a dollar increase could help reduce a low-income family’s debt by as much as $350 over the average length of a typical loan.