Making ends meet is much harder today than it was a year ago or before the pandemic.
Soaring inflation at 8.3% is forcing Americans to work harder just to buy less. If you weren’t working with a large income to begin with, the rising costs of essential items robs your quality of life and your ability to progress in America.
That’s why many Americans find the White House’s celebration of the Cut Inflation Act on Tuesday insulting to their plight.
The misleadingly named bill will not slow inflation as confirmed by nonpartisan analysis, but in the short term it could increase it according to Penn Wharton’s budget model. Meanwhile, grocery bills rose 13.5% in August from a year earlier as food prices rose at a rate not seen in 43 years.
Americans need solutions to pay for groceries, haircuts and home heating bills. Right now, Washington is not the source of solutions, but of problems, especially if they enact policies that restrict poor and minority Americans’ access to money when they need it.
Many minorities, especially women, are carving out a better life for themselves and their families while working in lower-paying jobs. Then a pandemic hit. It revealed how vulnerable the (minority) industries in which women tend to concentrate – leisure and hospitality, personal services and retail – were to prolonged shutdowns and an uneven recovery.
Today, there are 1.2 million fewer jobs in leisure and hospitality than before the pandemic began.
Two and a half years later, black and Hispanic families are expected to pull themselves together, but inflationary policies such as President Biden’s US bailout forced real incomes to fall 3.4% last month.
A recent NPR/Harvard poll indicates that due to inflation, black Americans are significantly more likely than whites to report serious financial problems (55% to 38%), are more likely than whites to report not having enough emergency savings for a month of expenses (58% to 36%) and food (32% vs. 21%). No wonder more than half of nonwhite voters (54%) disapprove of the president’s job.
Many non-white families are unbanked and cannot access traditional sources of credit or bank loans for unexpected expenses. An estimated 5.4% of US households (approximately 7.1 million) were unbanked in 2019. These are typically non-Asian minorities, low-income households, less educated households, younger households and households with disabled members who are more likely to be unbanked.
They often rely on short-term installment loans (pejoratively called payday loans) to pay a bill until they receive their paychecks. These products often carry high nominal interest rates at the annual percentage rate (APR).
If not repaid in a timely manner, loans can become very expensive. However, most borrowers repay the original amount borrowed within six months, according to research.
It is common for those who claim to care about the poor to deride the short-term lending industry. Worse still, legislators want to effectively eliminate these financial institutions by imposing arbitrary caps on interest rates. The Senate is considering a national interest rate cap of 36%.
The unintended – or perhaps intended – consequences of rate caps would be to prevent lenders from offering these loans. Higher interest rates reflect the risk of lending to someone with poor or no credit.
As a Federal Deposit Insurance Corporation (FDIC) paper concluded, “fixed operating costs and high loan loss rates justify much of the high APR charged on payday loans.” For the unbanked, these loans are a better option than more expensive and, frankly, more dangerous alternatives.
Amazingly, now even the institutions we trust to weed out scammers and bad businesses have targeted small dollar loans. The Better Business Bureau (BBB) has released a new investigative report into payday loan scams.
Operating in the shadow of a legitimate industry, individuals engage in fraudulent activities by taking advantage of vulnerable people.
The report is correct that the fraud is illegal and should be prosecuted. Unfortunately, the BBB unfairly groups small lenders with scammers as if they were one and the same.
To be clear, most small lenders don’t get an F rating from the BBB, and at least half get an A. But the BBB encourages industry critics and clings to rate cap proposals that would make offering such lending services financially untenable. .
The result would be disastrous, making the situation worse for vulnerable Americans. When Georgia passed a rate cap, borrowers bounced more checks, complained more about lenders and debt collectors, and were more likely to file for Chapter 7 bankruptcy.
Inflation doesn’t go away, so helping unbanked Americans access resources to meet their unexpected needs is critical. This is the message minorities want to hear from the president and national leaders.