Connecticut must stop cash advance applications from trapping people in debt
One man took out an advance before payday and landed in a “vicious cycle” of borrowing to cover his bills. Another felt he “completely lost control.” Another borrower pointed out: “The snowballing is inherent to the system. It’s not something you can escape.”
Connecticut has strong laws against predatory lending that prohibit shortterm payday loans with annual percentage rates, or APRS, over 300% that put people in other states in this kind of vicious cycle of reborrowing and debt.
But the three men borrowed from cash advance apps that do operate in our state. Rather than going to a storefront payday lender, people are increasingly using their phones for these “earned wage” advances. The packaging is different but these products are similarly dangerous. Without strong legal protections, both regularly trap consumers in debt.
To their credit, Connecticut state legislators recently enacted legislation making clear that our interest rate limits apply to these app-based wage advances. But wage advance companies are lobbying to stop this protection before it takes effect. Governor Lamont can stand up for Connecticut families by refusing to give in to this pressure and by implementing the law without delay.
I am a professor of psychiatry who researches connections between financial difficulties and mental health. My and others’ research shows how even relatively small loans can accumulate and cause extreme stress, anxiety, and depression. Unaffordable loans force people to conduct a nerve-wracking triage of other bills. I have provided financial counseling to borrowers who can’t pay utilities and live in fear of losing their heat, light and hot water. It’s not just mental health that is affected; for example, payday loan debt is associated with a range of serious physical health problems.
The similarities between earned wage apps and payday loans is alarming. Wage advances are financial quicksand, pulling people into unaffordable debt. Companies target lower-income consumers. They advance money ahead of payday and collect the entire loan on payday by payroll deduction or bank account debit.
Repayment from the next paycheck leaves people short for that month, so they often must borrow again. The fees may appear low but can pile up, including transaction fees and expedite fees, which, unsurprisingly, an overwhelming majority of borrowers pay to get money quickly. Data on several large lenders show that, on average, borrowers take out 36 loans a year and are charged fees equivalent to an interest rate of over 330% APR.
Some companies disguise their fees as “voluntary tips,” a misleading label as these “tips” are pledged to companies up front, not paid to human beings for good service. These lenders are not waiters, barbers, or other in-person service workers. By calling these costs “tips,” companies try to hide the true price of their loans. But California’s financial regulator found the tips can be “quite costly” and “identified multiple strategies that lenders use to make tips almost as certain as required fees”: companies have set default tip levels, obscured that tips are optional, curtailed loans and features if a user doesn’t tip, and claimed tips support charity.
Some apps have displayed emotionally manipulative images to guilt people into tipping. This deployment of behavioral psychology to take advantage of low-income consumers is shameful.
Cash advance apps that debit bank accounts can also trigger expensive bank overdraft fees. One company caused over 250,000 people “to incur the overdraft and other fees that it promised it would protect them from.”
There’s no doubt that people all too often fall behind on essential bills, or face unexpected, urgent expenses. But high-cost loans aggravate, rather than alleviate, financial difficulties.
Our state’s policymakers have an obligation to protect people from predatory lending that regularly causes debilitating debt. They took a valuable step toward fulfilling this mission by making clear that our interest rate limits apply to cash advances. It is now up to Governor Lamont to finish the job by fully implementing the law. Doing so would provide immense, tangible relief for many Connecticut families.
Annie Harper is an assistant professor of psychiatry at Yale School of Medicine who focuses on financial health. She has a PHD from Yale University in cultural anthropology, an MSC in Political Economy of Development from the University of London and spent several years working in international microfinance.