From Payday Loans to Pawnshops: Fringe Banking and Health


so my name is Anjum Hajat and I’m gonna
talk a little bit about payday loans and pawnshops and how these types of things
are linked to health and so I will start off with a little bit of background
because I’m gonna make an assumption that you know not everyone’s super
familiar with this so fringe loans are short term small dollar loans there are
things like payday loans pawn shops car title loans these are all examples of
fringe loans and the the thing is they tend to charge extremely high interest
rates so we’re thinking here in the realm of four to six hundred percent APR
so pretty astronomical so the issue here is that the people that use these loans
in general they don’t really have a lot of options right they don’t have great
credit so they can’t go to the bank they’re just not many options so they
turn to this fringe loan sector to meet their needs for credit the other issue
here of course is as you can imagine that fringe loan users tend to be more
marginalized historically they’ve been excluded from mainstream financial
services and that sort of is is has been the case up until this point so our most
recent data show that about 8% of US households have used a fringe loan in
the past year so I just want to give you a little bit of reference so compare
that to what you credit card you might be walking around with today and your
wallet you shouldn’t be paying I’m guessing more than 13 to 20 percent
interest rates so clearly really dramatic differences here in in what
what’s going on with the type of credit that some segment of our population is
is getting so many reasons for why people are using fringe loans or several
several of them shown here on this graph but an example of sort of how this works
in practice so for example an individual has a problem with his car his car
breaks down so he goes out to the pond to the payday loan place and says aren’t
any alone for about 400 bucks because I want to get my car fixed so I can get to
work so within two weeks so this is one of the issues with these loans is
they’re very fast turnaround you have to make your first payment within two weeks
which you know even for credit cards you still get a month right
so you have to pay at least the interest and in this particular case the interest
was $45 so when you calculate that out it’s about 300% APR right so it doesn’t
seem like a vast sum of money $45 but clearly much more than what most of us
pay so this the issue here is it really starts this cycle of debt right so many
fringe loan users you know they they’ll start with one but they can’t pay that
off so they have to get a second one to pay off the first one and then this sort
of goes on and on and some data have shown that the fringe loan users tend to
take out five loans to pay for that very first one and the timeframe in which it
takes them to pay this off actually really becomes you know prolonged so
it’s like a six month process to pay off this 400 hour loan for example so you
can see sort of the dilemma that people are in so obviously they need the car to
get to work if they don’t have the car they lose their job right these are not
jobs that have benefits and that are flexible and allow you to sort of miss a
couple days right you usually will get fired generally speaking so if you don’t
have a job you can’t pay your bills you know etc etc so clearly the option of
using this fringe loan is very attractive to some people so what we
were doing here in the research and bringing this background to health is to
really evaluate this association between people who use fringe loans and their
health so there hasn’t actually been much research in this area but you can
think about fringe loans as clearly a big source of debt and it’s both Jesse
and Wendy alluded to one of the reasons we think that debt causes poor health is
because of the stressful nature of it right and there’s a fair amount of
literature out there to show that stress is sort of one of the ways that things
in the external environment really become embodied and impact our health in
a negative way the other way that this could possibly
work is also something that Jesse touched on is material deprivation so
you can think about food insecurity neighborhood conditions being poor as
well as sort of poor housing choices if you just don’t have a lot of resources
so two potential ways that these types of services can be linked to health so
we did a study where we found a data source that actually had data on both
this was not an easy thing to do it’s actually quite hard
find people that are doing financial work actually thinking about health and
and vice versa so but we were able to do that and the results of the study were
sort of I think as one would expect fringe loans are indeed linked to poor
health so our data showed that fringe users were about 38% more likely to
report poor or fair health compared to non-users and here we really did try to
make sure these that the users of the loans and the non users of loans were
similar to each other as possible so we’ve matched on a whole bunch of
characteristics they were similar ages similar genders and race similar income
levels importantly so a lot of different things that we tried to do to to make
sure that we were making a fair comparison so although you know I don’t
think the results of the study are too surprising I think many people would
expect that I think what’s really exciting about this work is the many
policy implications that it has so I’m going to go through and talk a little
bit about policy and and different things that we can be thinking about
sort of broadly in society as ways to sort of deal with issues around fringe
loans and economic instability more broadly so the first thing that a lot of
people will think about is regulations so in fact there are many state-based
regulations out there so it’s a very much a state-by-state picture as you can
imagine so some states have capped the you cannot charge more than a 36%
interest rate for example on these types of loans and you know although that is a
very useful first step the problem here is if we were to sort of shut down this
industry altogether we are leaving people sort of stuck right
they have no credit sources whatsoever again they can’t go to the bank and if
we close this down they can’t access credit that way either so again thinking
about although I think you know regulations are a step in the right
direction it’s not the only answer we need really a much more multi-pronged
approach to solving this problem so the second potential policy solution
is to think about alternative financial institutions so here we are thinking
about things like bringing back a postal excuse me postal banking system which in
the u.s. many years ago we should have a very vibrant postal banking system we
can think about municipal banks this has been
something that’s been floated by some politicians of late and also getting
credit unions to sort of provide these types of of loans so you know banks will
tell you well it is just simply not profitable for me to provide a loan to
low income folks because they often defaults they don’t have a great credit
right so there’s no financial incentive for a mainstream bank to do this so
taking that financial incentive out of the picture is potentially something we
can do with thinking about alternative approaches here but really I think in
terms of the policy solutions we need to think about addressing the root causes
right so the core of the issue here is that is financial instability right and
scarce resources people just are not making enough money the low-wage jobs we
have today are just simply not cutting it right so social welfare and labor
policies are definitely one thing that we should be exploring and we are
exploring clearly here in Seattle with the fight for 15 so minimum wage is
being explored by many folks on campus as sort of to try to understand if these
changes that we’ve we’ve been implementing in terms of the minimum
wage have actually had any impacts on health so stay tuned for more on that
but in addition to you know minimum wage policies so California for example has
been floating ideas for how to create a universal basic income program as well
as to sort of expand their earn earned income tax credit so the EITC is one of
the largest pop poverty alleviation programs in the nation today actually so
you know definitely some promise there but in addition to income I just would
like to note that the other really important piece here is wealth and asset
building so there is a difference between income and wealth income is what
comes into the household and wealth is sort of your rainy day fund right your
fund for when something potentially goes wrong it’s your stockpile of funds so we
have in this country a massive gap in terms of wealth by race so recent data
have shown that african-americans have about 13 times less wealth compared to
white households in terms of net net worth so clearly very large racial gaps
in terms of wealth and there’s many historical reasons for they
but over time we’ve seen certain policies that have actually helped to
really continue the inequality so thinking again about ways to dismantle
those types of inequality are gonna require real action on our part and not
really just sort of allowing for market forces to sort of help alleviate the
problem so just some thoughts around policy solutions but I’ll stop there and
you know happy to talk more about this later

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