LEXINGTON, Ky. — High-interest payday loans are easily accessible and widely available. But for many residents, particularly in Appalachia and other rural parts of Kentucky and the country, those loans may contribute heavily to a cycle of poverty.

Hannah, a single mother of three children in eastern Kentucky who spoke on the promise of anonymity, said she has had terrible experiences with payday loans. She got stuck in a cycle of re-borrowing after experiencing some unexpected financial hardship during her divorce.

After more than a dozen consecutive pay periods getting a payday loan, it took her nearly two years to get out of the cycle. Hannah said even while getting the loans, she was doing little things to save money. She downgraded her cable and internet services. She lowered her thermostat and turned off lights that weren't needed. Hannah said she even started washing her clothes in cold water to keep the water heater from working so much.

"With my divorce, my household income was cut by more than half," she said. "I still had all the same bills and much less money to pay them. The first few payday loans helped a lot, but after a month or so, I knew I was getting in over my head. Each time I got one, I told myself that was the last one."

Now that she is no longer using payday loans, she said she is still suffering ramifications.

"They ruin people’s credit score when they believe it is helping. They look up your credit every time you go get a payday loan,” she said. “It is not worth going. Since the pandemic, they have lost business. People will continue to come each month depending on when they get paid. Most of the time, they can’t get away because of financial reasons and sometimes they will wait until income tax time to pay it off. Eventually, they will come back to get more payday loans.”

Hannah said she is still working on repairing her credit and has used her experience to educate her children about the dangers of high-interest loans. 

"I tried to hide the financial trouble from my kids, and for the most part, I think I did that," she said. "If they had been older at the time, I think they could have figured it out on their own. I have always worked a full-time job. My kids had always seen me go to work and come home, and they always have. There were times when I didn't know if I was ever going to get out of the payday loan cycle, but by doing what I had to do and with a little luck, I did. I hope no one has to go through something like this. An expensive form of borrowing makes no sense when you are doing it because money is tight."

The interest rates for payday loans can be expensive and difficult to pay off. Research conducted by the Consumer Financial Protection Bureau found that nearly 1-in-4 payday loans are re-borrowed nine times or more. It takes borrowers roughly five months to pay off the loans and costs them an average of $520 in finance charges besides the original loan amount, according to a report by Pew Charitable Trusts.

The average interest rate for a $300, 14-day payday loan in Kentucky is 469%, according to the Center for Responsible Lending. Senate Bill 165, sponsored by Kentucky state Sen. Jason Howell, R-Murray, would increase the charges consumer loan companies may charge. Howell did not respond to a request for an interview.  

The number of Kentucky residents getting payday loans decreased 20% from March 2019 to the beginning of the pandemic in March 2020, according to a report provided to the Kentucky Department of Financial Institutions by the loan processing firm Veritec Solutions. That represents a drop in lending of $8.3 million in the short-term, typically high-interest loans. The average payday loan in Kentucky is $348, according to the report.

Critics of the industry say the loans trap borrowers, including those in economically distressed Appalachia, into a cycle of debt. Research from the CFPB shows that over 75% of payday loan fees come from people who borrow more than 10 times in a year.

Stacy Smith works at a bank in Kentucky. She said she would like to see payday loans made illegal. 

“I see so many clients end up in bad situations because of payday loans,” she said.

In late 2020 and early 2021, several states moved to limit payday loan interest rates to protect consumers from getting in over their heads with these traditionally high-cost loans during the COVID-19 pandemic. 

About 200 million Americans live in states that allow payday lending without heavy restrictions, according to the Center for Responsible Lending. Even during the pandemic, consumers continued seeking payday loans with triple-digit interest rates. 

The rate of workers taking out payday loans tripled because of the pandemic, a recent survey by Gusto of 530 small business workers found. About 2% of these employees reported using a payday loan before the start of the pandemic, but about 6% said they had used this type of loan since March 2020. 

Nebraska residents recently voted to cap payday loan interest rates at 36%. Prior to the ballot initiative’s passage, the average interest for a payday loan was 404%, according to the Nebraskans for Responsible Lending coalition. In January 2021, the Illinois state legislature passed a bill that will also cap rates on consumer loans, including payday and car title, at 36%. 

An effort that aims to get residents out of the payday loan cycle is the Kentucky Financial Empowerment Commission’s Kentucky Bank on Network, a statewide partnership committed to increasing bank accessibility and accounts for individuals and businesses across the Commonwealth. The Federal Deposit Insurance Corporation’s How America Banks Survey found that nearly 8% of Kentuckians are “unbanked,” which is higher than the national average of 6%. 

“I am thrilled to bring the Bank On Network to the Commonwealth,” said Matt Frey, KFEC executive director. “Having a bank relationship is the first fundamental step for many individuals and businesses on their financial empowerment journey. Through the Bank On Network, organizations and financial institutions have a great opportunity to improve their communities.”

KBON members include organizations committed to increasing account access in Kentucky. Partners will learn from each other to build Bank On across Kentucky. KBON will increase account access for those in need, Frey said. KBON is an expansion of Bank On Louisville. Launched in 2010, Bank On Louisville is a collaborative partnership among local government, financial institutions and community organizations that work to improve the financial stability of unbanked and under-banked residents in Louisville. To date, Bank On Louisville has helped connect more than 47,000 residents to safe and affordable bank accounts and connected more than 25,500 residents to quality financial education.

“Getting payday loans is a cycle you can kind of get wrapped into,” Frey said. “It's important to identify that it is a cycle, because like a lot of things, you can just get in a bad habit. If you're part of a difficult system that's difficult to break out of, what can you do? What steps can you take to fight through that?” 

Frey said people are in one of two categories: those just getting started in this cycle of payday lending and those that have become dependent on them. 

“For the people just getting started out in this cycle, it's a slippery slope, and we want to avoid going down that slope any further,” he said. “To do that, my first recommendation to everyone that is in this situation is to get banked — find a financial institution near you where you can cash checks for free so you will not be charged a 400% interest rate or a fee for cashing that check. Because both — the interest rate and the fee for cashing the check — will chip away your income and money you deserve to keep.” 

Joining a bank also allows people to start a relationship with that financial institution, which can open up doors to other lending opportunities that are safe and affordable, Frey said. 

“You can get a line of credit of maybe $500 down the road and could eventually get access to a mortgage because of that relationship,” he said. “A second benefit of starting a relationship with a financial institution is that it helps you avoid the hassle. If you're talking about Eastern Kentucky, as I understand it, public transportation isn't a strong suit, so with those barriers in mind, how are you supposed to know what's the value of having a relationship with a financial institution setting up a bank account when you can even get that started in the first place or can't even get there?”

Frey said life can be expensive when one does not have access to a lot of resources and pride can often contribute to falling into the cycle of payday loans. 

“It can be embarrassing to ask for a small loan from a family member or a close friend,” he said. “But what you have to do is try to put that pride aside.” 

Low-interest micro loans from a financial institution and other financial alternatives can also help people curb the cycle of payday loans. Frey cited a community development financial institution called Redbud Financial Alternatives based in Hazard, Kentucky. 

“They do credit consolidation, educational workshops for recidivism and just all sorts of efforts to help people break through this cycle,” he said. “There are a lot of resources. It can be discomforting as an individual to be encountering new situations. This is something that many people go through. According to the FDIC, nearly 8% of Kentuckians don't have a bank account, and what can we imagine about their behaviors with payday lending beyond that?”

Small-dollar, high-interest payday loans are available in over half of U.S. states without many restrictions. Typically, consumers simply need to walk into a lender with a valid ID, proof of income and a bank account to get one.

Currently, there are a handful of states — Arkansas, Arizona, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont and West Virginia — and Washington, D.C., that cap payday loan interest at 36% or lower, according to the CRL.

States that do not have caps have very high interest rates. Texas has the highest payday loan rates in the U.S. at 664%, more than 40 times the average credit card interest rate of 16.12%. Texas’ standing is a change from three years ago when Ohio had the highest payday loan rates at 677%. Ohio placed restrictions on rates, loan amounts and duration in 2019, that brought the typical rate down to 138%.