How Do High-Interest Loans Affect Well-Being?

People working hard to make ends meet have limited and unpredictable resources. When they get a loan through alternative financial services, such as a payday, pawn, or title loan, they can end up paying steep fees or experiencing predatory practices. In these cases, all aspects of borrowers’ lives can be affected, including their physical and mental health, their family relationships, their role in the community, and their spiritual or ethical beliefs.

Physical Health

Low income and unexpected circumstances force people to make difficult choices, and for those with an urgent need for money, payday or cash advance loans can offer a lifeline.

At the same time, because of the short timeframe to repay these loans (usually a few weeks), stress is built into this type of borrowing. If borrowers can’t pay back a loan on time, they have to roll it over for a period of a few more weeks (thus incurring added fees). A pattern of repeated borrowing of the original sum plus fees can develop. As debt increases, so do people’s worries about how they’ll ever be able to repay their loans and get back on their feet financially. If borrowers have trouble paying back a loan, aggressive bill collectors’ tacctics can compound individual and family stress.

All this pressure damages well-being. Long-term stress is a threat to physical health. Chronic stress is associated with an increased risk of many serious diseases, including cancer, high blood pressure, stroke, heart disease, and diabetes. Other physical consequences of stress include accidental injuries, an increased likelihood of preterm birth, and skipped medical visits and treatments. Also linked to stress are premature death, poor self-rated health, and poor mental and physical health.

A recent study connects short-term loans (such as payday, title, rapid tax refund, and pawn loans) with higher waist circumference, body mass index (BMI), and C0reactive protein levels. These factors are associated with a greater risk for cardiovascular disease such as heart attacks and strokes. The loans are also linked to sexual problems.

Related research describes payday loans as a threat to public health because of the “corrosive effect” debt and financial instability have on borrowers’ physical and mental health.

Another study reports payday loan borrowers having skin rashes, severe headaches, muscle aches and pains, and digestive problems.

As well, quick loans with low barriers to access are associated with borrowers foregoing medical and dental care.

These and many other research projects point to a link between health and debt, especially short-term unsecured debt. Deeply indebted, low-income people are more likely to suffer from poor health and, as such, to have more trouble finding and keeping jobs that would help ease their debt. In this way, debt is both a cause and a result of poor health.

Mental Health

Debt tends to have a negative effect on mental health, with certain types of debt posing more of a threat than others. Depression, anxiety, poor psychological well-being, suicide, and substance use disorders are associated with indebtedness. People with debt are more than three times as likely to have common mental disorders as those with no debt.

An increase in mental illness is connected to payday-type lending. Depression and depressive symptoms, anxiety, poor psychological well-being, and child behavior problems are linked to short-term loans such as payday, title, tax refund, and pawn loans.

On top of that, a relationship exists between payday lending and suicides as well as fatal drug or alcohol overdoses. U.S. states that have banned payday lending enjoy a suicide reduction of 2.1% and a fatal drug overdose reduction of 8.9%.

There can be no well-being without mental health. By compromising mental health, high-interest, short-term loans harm the whole person.

Family and Partner Relationships

Most parents care deeply about giving their children a good start in life. A lack of money makes it much more challenging to do so. Single mothers and low-income families are some of the most frequent users of payday loans, and the most common reason is to meet regular ongoing living expenses, such as rent, bills, and food.

Lenders have designed payday loans to be prioritized over a borrower’s other debts and financial obligations. The lender typically keeps a post-dated check (or digital equivalent) that the lender can use to withdraw payments from the borrower’s bank account. As such, other expenses in a borrower’s budget must take a back seat to the payday loan. In effect, the payday loan company holds the borrower’s checking account hostage.

Maybe, then, it’s not surprising that in areas where payday loans are available, more families are clients of the Supplemental Nutrition Assistance Program (SNAP). As families prioritize repayment of payday loans, they turn to programs like SNAP to pay for food.

Families are also affected when a parent’s use of payday loans leads to nonpayment or underpayment of child support, depriving kids of essential resources. In places where payday loans are available, a 12% increase in falling behind in child support payments or paying a reduced amount is noted.

Unsecured debt (such as credit card, payday, or title loan debt) has a negative effect on children’s social and emotional health. This kind of debt can reduce available resources for kids and create an atmosphere of tension in the home. Parents’ stress can carry into the ways they interact with their kids.

Unsecured debt is also associated with partner conflict. Being unable to meet family financial needs sparks strong emotions. Payday loans in particular are linked to family instability, distress, and domestic violence.

A secure, stable family life is vital. It allows kids to enjoy their childhood and to grow into resilient, well-adjusted adults. By compromising the environment for childhood development, fringe loans can harm the well-being of the whole person.

Communities

Many payday lenders set up shop in or near distressed neighborhoods. Often, these are areas mainstream banks have abandoned. Quite a few residents have low credit scores, making them ineligible for most bank loans. It can be argued that payday loan stores provide a necessary and welcome service in these places.

On the other hand, payday lending businesses can weaken a community in a number of ways. The economic instability and inequality associated with high-interest loan debt can lead to social unrest, crime, and a breakdown of social cohesion. What’s more, the excessive fees charged by payday lenders suck capital out of the community. Many payday lending stores are owned by large corporations with out-of-state headquarters. The more money paid in fees to payday loan companies, the less is available to spend within the local economy.

As well, debt can contribute to residents having to relocate. Payday loan debt leaves families with less money available for their mortgage, rent, or utilities. Sometimes in these circumstances, people may have to move in with relatives or find more affordable quarters. In other cases, eviction or foreclosure may happen.

Residential instability is already a problem in low- to moderate-income neighborhoods, and it’s a barrier to people in a community developing trust, cohesion, and a sense of social support. Weak social ties cause parental stress. It can be hard, for example, to find a trustworthy person to provide emergency childcare. In a neighborhood with a high turnover of residents, parents can also worry about unfamiliar neighbors and about their kids’ safety when playing outside.

People who are lucky enough to be part of a strong community get a lot of benefits. Having social support increases resilience and aids in recovery from illness. This support also reduces risky behavior such as smoking. On the other hand, living apart from a social network can lead to chronic loneliness, a condition that poses a risk to wellness due to raised stress hormones and reduced immune functions and cardiovascular health.

Payday loans can interfere with the connectedness communities offer individuals. These types of loans can undermine a person’s position in the community due to the stigma and negative social stereotyping against people who use the loans. People in debt face social isolation, job discrimination, negative labeling, and even ridicule. The stigmatization and social exclusion are disempowering and threaten mental and physical health.

The health of a community is a key factor in the well-being of the whole person. A sense of interconnectedness is essential for growth and flourishing. High-interest loans can harm both the community at large and the people within it.

Spirituality

High-interest lending has moral implications because it affects how a society shares wealth and provides security for its members. Greed and unfairness are moral issues raised by this type of lending.

Payday, pawn, and title loans carry a steep interest rate. So do other alternative financial services such as rent-to-own transactions and in-house auto financing. Even mainstream banks, in effect, charge exorbitant interest in the form of overdraft fees. Several world religions specifically address such lending practices.

Islamic finance requires avoidance of riba (unjust or exploitive gains). Interest is considered unearned income that increases the disparity between the rich and the poor, and charging interest on a loan is generally avoided.

The Christian Bible cautions those with money not to charge the poor to borrow it. Interpretations have changed over time. Nowadays, ordinary interest is viewed as fair payment to the lender, but usury describes the practice of charging an exceptionally high interest rate that “disrupt[s] a relationship of equality between people.”

Judaism, Buddhism, and Hinduism have also examined the issue of charging interest. They generally maintain interest is acceptable if the rates are fair and reasonable, especially for the poor.

Overall, high-interest lending practices can perpetuate cycles of poverty, exploitation, and inequality, which run counter to spiritual principles of justice, compassion, and solidarity. Addressing these issues requires not only economic reforms but also a deeper commitment to values that prioritize the well-being and dignity of all members of society.

Key Takeaways

Whole person well-being is an integration of many parts, and debt touches all of them. Enough evidence is out there to show a strong link between short-term, high-interest lending and severe consequences for physical, mental, emotional, social, and spiritual well-being.

It’s important to recognize the negative effects these loans have on people.

But payday loans serve a purpose, and they aren’t going anywhere soon. Even in places where they’re banned, residents go to neighboring states or online for a quick loan with no credit check. Of course, it’s still worthwhile to shine light on predatory practices and to oppose them.

Another way to curb financial exploitation is to decrease the demand for short-term loans. Currently, low wages, financial exclusion, and a high cost of living (especially for healthcare) fuel the need for payday loans.

Solutions offered to address these problems include paying people a living wage for their work, providing universal healthcare and basic income, and reducing barriers that keep people from achieving their full potential. Financial education is another piece of the puzzle.

Increasing economic justice is a challenging problem but one worth addressing, considering all that’s at stake.

Start or Join a Conversation

Many different perspectives are possible about the effect of high-interest loans on well-being. Your thoughts are key to this community. Please share them here. If you don’t already have an opinion at the top of your mind, consider sharing your views on one of these points:

• How do you think payday and other high-interest loans affect the whole person?
• Is the criticism of lenders deserved?
• What would equitable consumer finance services look like to you?

If payday loans have ever impacted your well being or that of someone you know, your thoughts would add a lot to this conversation. Please share them in the Comments section below.

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Notice

This post is for educational purposes only and is not legal, financial, psychological, or any other type of professional advice. You should consult your own attorney, financial advisor, health provider, or counseling professional concerning any issues in these areas of expertise.

Please understand that facts and views change over time. Posts reflect the author’s understanding at the time of the most recent update (April 2024), as well as the perspectives of external sources for this post. While maintained for your information, archived posts may not reflect current conditions.