Personal loans trap Social Security recipients in debt

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In Spanish | The slowing economy could push more Social Security recipients to take out high-interest payday loans, running the risk of being caught in an ever-increasing cycle of debt.

A payday loan is usually a short-term loan of less than $500 generally intended for people with low incomes. Fees generally range between $10 and $30 for every $100 borrowed. If you borrowed $300, for example, you will have to pay between $30 and $90 in fees. Borrowers write a check for the loan amount, plus fees, to the lender as of their next payday date. The lender cashes the check on the borrower’s payday and collects the principal and fees.

If you are collecting Social Security Administration (SSA) benefits and can verify your payments, you are usually eligible for a payday loan. Payday lenders welcome Social Security recipients because, unlike part-time workers, their payouts are stable and reliable. And for many people, including Social Security recipients, loans are quick and easy to get.

Comfort at a high price

The convenience of payday loans comes at a high cost. A typical two-week payday loan with a fee of $15 for every $100 borrowed equates to an annual percentage rate (APR) of nearly 400%, according to the Consumer Financial Protection Bureau (CFPB). In contrast, the typical credit card has an APR of around 16%, according to

Some economists argue that payday loans can be a reasonable solution for short-term cash shortages, if you pay them back quickly. “The problem with these loans is when you pay off a loan and you don’t have enough money for the next pay period,” says Kimberly Blanton, who writes the Squared Blog for the Center for Retirement Research at Boston College. “And so you borrow more.”

It is an expensive strategy. If, in two weeks, you can’t afford to pay off that $300 payday loan with a $45 fee, the borrower might suggest you pay just the fee, rather than the loan principal. But on the next payday, you’ll still owe $45 in fees plus principal, which means you’ll now have paid $90 in just one month to borrow $300.

“The industry is saying, ‘Look, borrowers have to fix their car and go to work to keep their jobs,'” says Haydar Kurban, professor of economics at Howard University. “The problem is someone who takes out 10, 12 loans a year. And the payday loan strategy is to attract borrowers multiple times.”

For recipients of Supplemental Security Income (SSI), a program run by the SSA to support some people with little or no income, there is an added danger. A loan doesn’t reduce your SSI benefit, but any funds you borrow and don’t spend will count toward the $2,000 resource limit for an individual (or $3,000 for a couple) the following month. . If the value of your resources exceeds the authorized limit at the beginning of the month, you cannot receive SSI for that month.

Mara R. Wilmoth