Expecting a stimulus check? You might want to shield it from payday lenders
Consumer advocates worry the checks, expected to arrive as soon as this week, could get snatched by payday, title and high-cost installment lenders.
The $1,200 economic stimulus checks from the federal government are expected to start arriving this week, and they’ll be a godsend to people who need to pay rent, mortgages, grocery bills and medical bills.
But consumer advocates worry payday, auto title and high-cost installment loan companies might be set to snatch that money out of people’s accounts.
That’s because many of these loans — known for their sky-high interest rates — have contracts that allow the lender direct access to the borrower’s account, which is set up to make automatic payments.
Some lenders also require borrowers to give them a post-dated, physical check in case a payment is missed.
“For obvious reasons, the companies will want to do automatic payments because they want to be the first in line. That’s the whole business model,” says Brent Adams, senior vice president at the Woodstock Institute, a nonprofit research and policy organization focused on fair lending, wealth creation and financial systems reform.
In an April 9 letter to Gov. J.B. Pritzker, the Woodstock Institute, Illinois Public Interest Research Group, Heartland Alliance and 17 other organizations asked the governor to put a stop to all auto-payments to such lenders and instead require them to accept payments by check, credit card or electronic funds through May 31 or later if the crisis goes on longer.
The groups also want payday, title and high-cost installment lenders to be barred from adding late fees.
“The economic stimulus payments were obviously not meant to stimulate the payday loan industry at the expense of Illinoisans’ health and well-being,” the letter says.
Pritzker already has taken action protecting title loan borrowers with an executive order halting car repossessions during the disaster period.
“This crisis presents tons of opportunities for creditors to seize cash payments, or for predatory actors to scam individuals during a difficult time,” says Jody Blaylock Chong, associate director of Heartland Alliance.
“Families need to be able to choose how to spend their money to support their loved ones during the pandemic.”
Most adults who qualify for the government payment will receive $1,200, though some could get less depending on a variety of factors. The government is using a formula that takes into account a person’s adjusted gross income, with individuals at $75,000 or less receiving the full amount.
Each qualifying child age under the age of 17 will add $500 to the payment.
Kesha Thompson took out a title loan in December, pledging her 2015 Lincoln MKS as collateral — a $1,200 advance to help launch her new woman-owned business, which provides an array of services including property preservation, moving and logistics, IT and smart-home technology.
The loan has high interest — an annual percentage rate of 197% — but Thompson planned to pay it off quickly and only incur a few hundred dollars.
“I had the mind frame to just pay it all at once,” Thompson says. “Unfortunately, life happens.”
When the coronavirus pandemic hit, several clients postponed their scheduled jobs, and now Thompson is left juggling a mortgage, utilities, food for her family of four and other expenses.
Thompson says she uses an app to make her title loan payments and doesn’t have auto-pay enabled.
She’d like to use some of the stimulus money to pay off the loan but might not be able to stretch it that far.
“I have the mortgage that’s due. The mortgage will take precedence over everything,” she says.
Adams says that’s smart, because a late payment to a title or payday lender will not be reported to the major credit bureaus. That’s not the case with a late mortgage payment.
Households facing unemployment or work slowdowns will need to conserve their one-time government check, he says.
Consumers who are struggling because of the coronavirus pandemic should proactively contact their payday, title or high-cost installment lenders and ask to freeze their auto-payments and not be hit with extra fees for late payments. Adams says he talked to one lender who is offering to grant an interest-free freeze to any consumer who requests it.
“They need to contact their lender because they need to be thinking very thoughtfully about how they need to use their stimulus checks,” he says. “And paying the payday lender is low on the list.”