Payday loans are promoted as an easy way for consumers to get cash - until their next payday. A borrower writes a personal check to the payday lender, who holds the check for a period of 14 to 31 days. At the end of that period, the check is deposited, the borrower returns with cash to reclaim the check, or the loan gets renewed and the borrower pays additional fees. Because of the loans' short terms, high fees, and balloon payments, borrowers are rarely able to repay the loan without taking out a subsequent loan shortly thereafter to fill the financial gap created by the initial payday loan. This is the debt trap.
The industry argues that payday loans are a high-demand financial product to help families bridge unexpected financial gaps. In reality, the very nature of the product makes it nearly impossible for the borrower to repay the loan in one pay period. The person who cannot raise $100 today probably cannot raise $117 two weeks from now. The CEO of Cash America, one of the largest payday lenders in the country, said this at an industry conference - "The theory in the business is, you've got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that's really where the profitability is.”
In 2010, the average Missouri payday loan of $308 carried an annual percentage rate of interest (APR) of 445%. In 2010, there were about 2.4 million payday loans made in the state of Missouri alone – a state with about 5.9 million men, women and children. These loans totaled about $747 million, the bulk of which was generated by borrowers stuck in one loan after another.
At any one time, about 1,040 payday loan stores operate in Missouri. They tend to be clustered on the edge of low-income communities. Consistently, studies show that 90 percent of payday lending business comes from borrowers trapped with five or more loans per year. Sixty percent of payday loans go to borrowers with 12 or more transactions per year, and twenty-four percent of loans go to borrowers with 21 or more transactions per year. Over seventy-five of payday loans are made shortly after a previous loan was paid off.
Between 2008 and 2010, the industry shrank. This seems odd during a recession for an industry that claims to help those in financial distress. In Missouri, between 2008 and 2010:
- The number of active licensees declined by 18%, (from 1,275 to 1,040).
- Loan volume, including renewals, declined by 14% (from 2.83 million to 2.43 million).
At the same time, lenders are squeezing more from existing Missouri customers:
- The average loan size grew from $290 in 2008 to $308 in 2010 .
- Average APR grew from 431% to 445% APR, due to an increase in fees.
Missouri does not compare well, either among our neighbors in contiguous states, or among the 50 states. In fact, Missouri is one of the most saturated states in the country This is not an achievement to be proud of.
Although Missouri has allowed high-cost, triple-digit interest rate payday loans for nearly two decades, others have not. No state has authorized payday lending since 2005. The trend has been towards reining in 400% or greater interest rates. Today, 17 states plus the District of Columbia, accounting for one-third of the U.S. population, cap small dollar loans at or around 36% APR.
In 2007, Congress enacted a 36% rate cap on payday and car-title loans to active military families after finding that payday loans “undermine military readiness [and] harm the morale of troops and their families..." In the civilian world, payday loans continue to undermine family well-being and cause undue stress on families already dealing with the challenge of inadequate resources.
In the November 4, 2008 general election, Arizona and Ohio voters clearly mandated a two-digit rate cap for short-term loans. In both states, the payday lending industry placed measures on the ballot that would have authorized triple-digit interest rates. Voters soundly rejected those initiatives by a margin of 2 to 1. Voters reached similar conclusions in Montana in the 2010 election when 72% voted to lower the interest rates on payday and car title loans from 400% to 36% APR.
Where high-cost lending is banned or capped, both borrowers and communities benefit. A study in North Carolina sponsored by the North Carolina Banking Commission found that after payday loans were brought under a 36% rate cap, former payday borrowers were glad they no longer had the temptation of what they viewed as an expensive product that was easy to get into, but hard to get out of. Former borrowers relied instead on a number of strategies, including borrowing from family or friends, getting an advance from their employer, paying bills late, receiving charity, and building up savings for emergencies.
Through my work directly with borrowers, I have observed the damage that payday loans can cause for a family already struggling just to get by. People trapped in payday loans often do not understand their terms and features. Payday loans sometimes are accompanied by other high-cost loans or rent-to-own contracts, and consumers do not make the distinction between payday loans and other types of small loans.
One consumer I worked with told me she thought payday loan stores were “banks for poor people.” Before her finances collapsed, she referred friends and families to the “bank” she found, each time receiving a $20 to $25 finder’s fee. By the time I met her, she was wracked with guilt because she had set up her own children to get trapped in the same trap she found herself in.
Payday lenders are more than willing to make loans to people with developmental disabilities, cognitive impairments, and other disabilities – people who are clearly unable to understand the terms of their loans. I worked with one borrower who had suffered a traumatic brain injury, was receiving disability payments, and had a caseworker who had been unaware of his loans and rent-to-own contracts. Working with his caseworker, we were able to help him pay off $1400 in payday loans through a loan with affordable payments from his credit union, a loan for which he could have qualified all along. Shortly thereafter, he was a passenger in his caseworker’s car in the Taco Bell drive-through lane when one of his former lenders jumped out of his own car and ran up to his window to tell him he had some money waiting that he could borrow. All he had to do was come down and sign the papers, and the money was his. Fortunately, the borrower's caseworker helped shoo away the lender. Most victims do not have such advocates to protect them.
Payday lenders are not necessarily very nice when someone tries to pay off their payday loan debt instead of renewing or making a new loan. I listened on speaker phone with someone I was trying to help get the information she needed to work on her payday loan debt. She needed copies of her contracts from five different lenders. Excuses for not faxing or sending the contract papers she requested were interesting. One said the contract was too light to copy. Another said it was at a corporate office and it would take her awhile to get it. Quite surprisingly, another said, “We can’t do that. It would violate HIPAA regulations.” Huh?
Debt collection tactics border on or are illegal. When one borrower got a call from a debt collector telling her the sheriff was coming to take her to jail if she didn't pay her payday loan debt, she called me in a panic. I called the debt collector back to ask her if it was true that she had threatened to send someone to jail for an uncollected debt. After some denials and excuse making, she became hostile with me, calling me by name and making it clear that she knew where I lived. Other borrowers tell stories of collectors showing up at their work site, jeopardizing their employment, and calling friends and family to embarrass them. Such collection tactics are in addition to the overdraft fees charged by the banks and the insufficient fund fees charged by the payday lender, who sometimes run checks through the bank over and over again just to tack on fees. Then there are the late fees also charged by the payday lender.
We all need to work together as a community and as a state to protect vulnerable and uninformed consumers. We need to engage in outreach and community-based education to help consumers understand the products they are being targeted with. We need to enact reasonable and fair regulation of lenders. It is not enough to provide regulation unless we also provide resources and a clear mandate to enforce the regulation. We need to create affordable small-dollar loan products, which some community groups and credit unions are beginning to do. When people find themselves so far in the hole with payday loan debt that they can’t climb out, taking out another payday loan is the last thing they should do. What they need is a ladder to climb out – not another payday loan that is really just a shovel to help them dig the hole deeper.
On August 18,