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 us

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