Payday Lenders Provide Valuable Service to Rhode Islanders

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Wednesday, May 16, 2012

Jamie Fulmer, GoLocalProv Guest MINDSETTER™

Many Rhode Island residents face financial shortfalls every day – a child needs to see a doctor or a bill comes due before payday. They worry about covering urgent expenses and their regular monthly bills. Their savings and credit options are limited. For many, a payday loan is the most affordable and reliable option to get through these rough patches.

Payday loans provide small-dollar, short-term credit for meeting unanticipated, urgent expenses at a competitive price. Many working families say they choose this service because it’s simple and the costs and terms are fully disclosed, unlike many other forms of credit. Unfortunately, there’s a lot of misunderstanding about payday lending. Here’s how it works: For a two-week loan, customers are required to show identification, a source of income and evidence of an active bank account. The loan amount is determined based on the customer’s ability to repay. They pay a one-time, flat fee of $10 per $100 borrowed. Whether a customer repays their loan in three days or fourteen, they pay the same one-time fee -- there’s no compounding interest and no impact on a borrower’s credit rating.

Most importantly, the majority of our customers use payday loans responsibly. They make a reasoned choice to use our service over alternatives with higher costs. For example, paying $10 to borrow $100 from a company like mine, Advance America, can mean avoiding the $35 median fee for overdrawing a checking account or the $38 reconnection fee from National Grid for a missed utility payment. And our customers are overwhelmingly satisfied with the product – our satisfaction rates are over 90 percent.

Our Company is committed to responsible lending and to helping consumers be successful borrowers. Our terms are straightforward and transparent because we want to ensure that our customers understand all the details of their transaction. We also provide strong consumer protection measures, including truthful advertising, fair collection practices and an extended payment plan, which allows customers a longer repayment period at no additional charge. Further, Rhode Island law significantly protects borrowers, setting a $450 maximum loan and limiting fees to 10 percent of the total loan amount.

But, some in Rhode Island are trying to functionally ban payday loans by imposing a 36% Annual Percentage Rate cap. While it sounds reasonable in theory, this would limit the fees we charge to $1.38 per $100 borrowed. That’s just 10 cents a day for a two-week $100 loan. The simple reality is that no company can loan money for 10 cents a day and still afford to pay their employees, rent and utilities. If this law is approved by the legislature, lenders would be forced to close their doors and a service many Rhode Island families count on would disappear.

Eliminating this valuable credit option is not the answer. In states that have banned payday lending, consumers continue to face financial challenges, but have fewer options to address them. After Georgia and North Carolina effectively banned payday lending by instituting a rate cap, the Federal Reserve Bank of New York found that people “bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 (‘no asset’) bankruptcy at a higher rate.”

In Washington State and the District of Columbia, payday loan limitations have forced borrowers to seek out unregulated, illegal offshore Internet lenders. Regulators have seen a sharp increase in complaints as consumers are bilked by unscrupulous companies who operate outside the jurisdiction and protection of state law.

Payday loans help to bridge a gap in the credit market. Consumers should be smart about their money and savings, and any form of credit can be abused. But it is important to understand that payday loans are a sound choice and an effective short-term financial tool for many people. It would be unfortunate if the General Assembly ignores consumers’ interests and takes them away, leaving hardworking Rhode Island residents to suffer the consequences.

Jamie Fulmer is the Vice President of Public Affairs for Advance America.

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