Guest MINDSETTER™ Uriah King: Time to Stops High-Interest Payday Loans
Saturday, May 26, 2012
There’s a saying among salesmen, “create a sense of demand, rather than wait to have people actually demand your product.” There is no more fitting description than what happens in payday lending. Payday lenders market and lobby their product as a quick fix intended to tide borrowers over until the next payday. However, a payday loan is rarely the “fix” struggling borrowers bargained for.
Nationwide, the average payday borrower is stuck in 9 payday transactions a year. Over 60 percent of payday loan business is generated by borrowers with 12 or more loans annually and payday borrowers are twice more likely to file for bankruptcy or default on a credit card than comparable non-borrowers. The average annual interest rate for a payday loan in Rhode Island is 260%---over 7 times the legal limit approved by Congress for military families.
All these numbers add up. Over time, these numbers become real losses for families, Rhode Island small businesses and the state economy. That reality is one reason why 17 states, the District of Columbia, and Congress limit payday loan rates at or around 36%. All these states have realized that, talking points of out-of-state payday lenders aside, 260% annual interest rates do more harm than good.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTMake no mistake, the lenders know this too. The CEO of Cash America, one of the largest payday lenders in the country, openly admits that “the theory in the [payday lending] 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." State data confirms this statement revealing that over 75% of payday loan volume is generated by borrowers stuck in a cycle of debt.
Yet when it comes time to curb those flaws, payday lenders offer legislators empty concessions or find a straw man to blame to keep real reforms at bay. Time and time again committed legislators from all across the country get deceptively sold empty reforms like renewal bans, extended repayment plans, cool-off periods, and other meaningless consumer protections. For example, Florida has adopted a laundry list of reforms proposed by payday lenders and yet they have some of the worse debt trap outcomes in the country.
When sham protections are not enough, payday lenders distract legislators by blaming Internet lenders or other boogey-men. Ironically, the largest payday lender in the country is also one of the largest Internet lenders. Moreover, Internet loans are already illegal in Rhode Island. Unlicensed Internet lenders already cannot collect, sue or garnish for payment on their illegal loans in this state.
If deception doesn’t work, payday lenders then turn to fuzzy math to defend their high interest rates. They claim, for example, to only charge “10% percent” when they actually charge 260% APR or that no lender can survive with rates below 36% when community banks, credit unions, and credit card companies do it every day.
Instead of distracting Rhode Island’s legislators, payday lenders should address the faults with their product. After all, payday lenders have had long enough in Rhode Island to reform their 260% loans. Now 39 organizations that include Rhode Island AARP, AFL-CIO, and the Rhode Island Council of Churches, are saying enough is enough. They are asking legislators to approve a rate ceiling that will still allow payday lenders to charge $36 per $100 borrowed during the year---the same standard that applies to military families.
With or without 260% interest rates, families in Rhode Island will access to affordable credit options. Payday funded studies have found that 94% of payday customers have somewhere else to go to borrow. Meanwhile in North Carolina, where payday lending was once legal, a study found that three out of four low- and middle-income families were unaffected by a cap on payday lending. Ending triple-digit rates on payday loans simply opens the door for responsible, affordable small loans to flourish.
Don’t be fooled by the payday rhetoric: putting in place a rate limit on payday loans makes sense for Rhode Island.
Uriah King is the Vice President of State Policy at the Center for Responsible Lending.
