Summary

Socioeconomic trends in the United States have mired all but the wealthiest Americans in a culture of debt. In the average household, consumer debt has tripled since the 1980s and is now more than twice as high as household income. But the burden is most severe in low-income communities and communities of color, where many people don’t qualify for conventional bank loans or credit cards. When they face a financial short- fall many turn to payday and other high cost lenders.

These predatory institutions make short-term loans of several hundred dollars to anyone with an income, a checking account, and valid identification. Repayment is typically due in two weeks – plus hefty fees and staggering levels of interest: Charges to borrowers each year, from the largest payday lenders in the state, amount to an average annual percentage rate (APR) of 252%. More than eight in 10 borrowers in the state are unable to repay on time. Most pay only the interest and renew the loan, an average of 10 times, with fees and interest piling up each time it’s rolled over.

The industry takes unfair advantage of economically vulnerable Americans on the financial brink, increasing inequities in income, wealth, and health. Payday loans aggravate problems in mental health, employment, the borrowers’ family lives, and in their already-struggling communities.

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Compelling Evidence of Harm

This Health Impact Assessment (HIA) looks at the compelling evidence of the harm caused by payday loans to the health and mental health of borrowers, their families, and their communities. It shows that reforms to payday lending – including elimination of the practice in the state – will help slow the drain on individual and community resources, reducing stress and preventing further harm to health and well-being. This report is meant to inform the debate over legislation expected this year in the Minnesota Legislature that would set limits on the interest rates payday lenders can charge.

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A Disproportionate Burden

The average payday borrower earns about $30,000 and would be unable to repay a $400 payday loan on time based on the cost of living in the state. Payday storefronts are most likely to be located in communities with higher proportions of people of color, people with lower income, and lower levels of education, immigrants, and renters. An analysis of Census tracts shows that African-Americans are twice as likely as Minnesotans as a whole to live within 2.5 miles of a payday loan store. Analysis also showed that in the counties where interest and fees per person were highest, the majority of these were also counties that have a higher African American population.

There is a long history of overt and covert social policies – for example through mortgage and homeownership restrictions and through redlining – that converged to create less income and wealth for people of color broadly, and African Americans specifically. Payday lenders take advantage of these racial inequities in income and wealth by targeting certain borrowers, ultimately magnifying their financial strain.

Obviously, this wealth drain directly affects health and well-being: Higher income and wealth are among the strongest predictors of good health, and poverty is one of the most harmful to health. People with higher incomes live longer, get more education, have access to better health care for themselves and their children, eat healthier food, live in safer neighborhoods and enjoy many other benefits that contribute to good health. Falling ever deeper into the cycle of debt makes it impossible to save money or accumulate other resources that could lift people out of poverty.

But the indirect effects are just as harmful. Being in debt and worrying about whether you can repay a loan is extremely stressful, both on borrowers and their families. Chronic stress, particularly financial stress, has profoundly negative effects on health, including cancer, heart disease, stroke, diabetes, hypertension, ulcers, and compromised immune function. Indeed, data reveal that the majority of Minnesota counties with a payday loan store rank in the bottom half of the state for health outcomes such as premature death and self-rated health.

The negative effects of the wealth drain brought about by payday loans also spill over from borrowers and their families to the communities the industry claims to serve. The presence of payday lenders in a community is associated with financial hardship and crime, putting vulnerable communities at greater risk of poverty and disinvestment.

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Recommendations

This report supports the findings of many researchers that both national and state regulations are needed to prevent the payday loan industry from taking advantage of the most vulnerable Minnesotans, thereby increasing economic insecurity and income and racial inequities. Payday lending further threatens the health of borrowers who experience financial strain, and worsens existing health inequities by trapping people and communities who are struggling to make ends meet in a cycle of debt and stress that extends beyond borrowers to their families and communities.Stronger regulations on payday loans would help protect more than 50,000 Minnesotans and their families from these impacts. But regulations alone won’t eliminate the problems.

Therefore, we recommend:

• The Minnesota Legislature should take concrete steps to ban the practice of payday lending in the Tighter lending standards, restrictions on how many times a loan can be rolled over, and interest rate caps would protect borrowers from the worst abuses of payday and would help reduce the harm of payday lending to borrower health. However, the absolute greatest benefit to health and equity would be the elimination of the payday lending industry altogether. Doing so would stem the significant wealth drain from communities and increase the likelihood that borrowers access more safe and affordable financial services.
• In response to the significant economic and racial inequities that persist in the state and under- lying financial distress experienced by payday borrowers – and others who are financially insecure – the Minnesota Legislature should take steps to address the broader problems of poverty and low incomes, such protecting and creating jobs, providing worker protections such as paid family leave and sick leave, increasing affordable housing, and improving education in communities that have historically been disinvested in.
• Public and private sector financial service providers, including banks, credit unions and community-based financial service providers, should invest in innovative ways to meet the need for affordable small dollar loans and encourage financial planning, savings, and credit building.
• State and local agencies that fund economic development activities should organize community workshops and forums that address financial strain, debt, stigma and mental health, and empower community members to advocate for payday loan reforms and other economic security policies.