How the Sequester Will Lead to a Rise in Payday Loans
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UPDATED: Mar 13, 2013
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The dreaded Sequester is here.
Like a storm on the horizon slowly rolling towards America, it has finally arrived.
While the finger-pointing is in full swing in Washington D.C., the repercussions of the massive federal budget cuts are already being felt.
In fact, the Sequester’s squeeze may end up leading to a boom in payday loan borrowing.
Let’s take a brief and broad look at what the Sequester is before diving into how a massive budget cut would lead to a rise in payday lending.
Birth of Disaster
The Sequester took effect on March 1, 2013, after a very heated blame game between the Obama Administration and Congress.
One could say the Sequester was “conceived” in 2011 as part of the Budget Control Act of 2011. The goal was to incentivize the Joint Select Committee on Deficit Reduction to reach a deal that would cut over a trillion dollars over one decade. Unfortunately, a deal was not reached thanks to one of democracy’s side effects of granting our government the right “not” to compromise.
The Sequester got lumped into the big fiscal cliff and was delayed until March.
Now, the Sequester itself is divided up into several types of “cuts,” with the largest being defense.
So there you have it, the horribly political story about the Sequester’s messy birth.
But what does a defense budget cut have to do with payday loans? A great deal, to be honest.
The Sequester has cut military and defense spending. This means that vehicle and weapon purchases are in decline. Contractors and defense industry employees now have less income as a result. On top of that, military civilian employees, such as dining hall employees and trainers, are also feeling the pressure of reduced income due to closures.
The problem only begins there.
The Chain Reaction
“The suffering will primarily come from job losses, furloughs, and benefit reductions,” Patrick Kelly, consultant at financial advisory group Impact Partnership, said to loans.org.
These employees live near military bases, where their skills and talents enhance the military’s capabilities, and in turn their disposable income is spent near where they live. Here is where the problem expands.
Local businesses, such as restaurants and retail stores, will experience a drop in business now that people affected by the Sequester will have lighter wallets and purses. In fact, hundreds of thousands will lose their jobs.
What will happen to the employees or these restaurants and retail stores? Their managers and employers will be forced to slash their wages and salaries. Now, facing their “localized” recessions, they will be forced to extensively budget their finances. Many though, will fail.
In failure, they will turn to credit cards, selling valuables, and borrowing payday loans to survive.
A Desperate Rush
No doubt, at least a few of these desperate people will end up borrowing the wrong payday loan from the wrong payday loan lender. While some will be fortunate and borrow payday loans with protections and interest rate caps, those who borrow unregulated and unethically formed payday loans will be in for a rude awakening as they end up owing sizable amounts of money.
These people won’t be the first or last to borrow payday loans. The chaotic time in the immediate aftermath of the Great Recession saw a boom in borrowing as newly unemployed people depleted their savings and credit. The unfortunate people affected by the Sequester can look forward to a similar fate; at least those that borrow from the wrong lender.
“Any time an individual makes less income, whether directly or indirectly, it will almost always have a direct correlation to their credit score,” said Kelly. “Less income means more defaults on outstanding debt. And more defaults means lower credit scores.”
Unfortunately, storefront lenders in cities and towns near military bases are in short supply. Sure, some exist past the boundaries mandated by the Military Lending Act, but the real danger may be online.
Payday loan websites are more difficult to regulate than storefront payday loan lenders. It’s generally harder for the judicial system to handle a website’s alleged misconduct than it is to do the same for a retail lending store.
While it is difficult to predict just how deep or shallow these hundreds of thousands affected by the Sequester will get themselves into debt, it is easy to see the difficult road ahead for them.
“The partisan politics have raged for too long,” said Kelly. “Both sides of the isle need to come together and do what’s best for this country, not just for their personal election campaigns.”
Unfortunately, the public can only sit and wait to see if Congress and the Obama Administration will ensure that the difficult road is a short and brief journey.