Cap interest on payday loans; create better options
Sept. 18, 2008
"And 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."
- Dan Feehan, CEO of Cash America, speaking to the Jefferies Financial Services Conference, June 20, 2007.
Tim Miller in his Aug. 20 column in the Register defended payday lending as "protecting consumer options." But, as the quote above illustrates, payday lending is not about helping cash-strapped people out of a tight spot. It's fundamentally predatory and designed to magnify - not manage - debt.
In 2006, the Ames cluster of A Mid-Iowa Organizing Strategy (AMOS), a broad-based, nonpartisan community-organizing group, conducted 80 house meetings with more than 600 people in Ames. One of the concerns that arose repeatedly was that payday lenders are trapping the financially vulnerable, including many in AMOS' member organizations, in a cycle of debt.A single payday loans is a terrible deal. The $15 fee on a two-week, $100 loan yields an astronomical 390 percent annual percentage rate. At that rate, a payday loan is comparable to money from a loan shark or the Mafia, albeit with better customer service.
But the real problem occurs when borrowers cannot both pay off the loan and afford the essentials - rent, food, transportation, etc. - and they take out another loan to pay off the first.
The Center for Responsible Lending reports that the average borrower who resorts to payday loans takes out 8.7 payday loans per year. More than 60 percent of payday loans go to people with more than 12 transactions per year, and 24 percent go to people with more than 21 transactions per year.
The standard defense from payday lenders is that they provide a service to those who need a quick source of cash. However, only about 2 percent of loans are paid on time and followed by no other loans in the same year.
Rather than defend a bad practice, as communities we must develop responsible alternatives to payday loans, including loans with longer payment periods, credit-union loans, small consumer loans, emergency-assistance programs and consumer-credit counseling.
And we need to do to payday lending what the Legislature wisely did in 2007 to car-title loans: Cap the interest rate.
After the Legislature took this action, the stores that were formerly car-title lenders put up new signs as payday lenders. In Ames, payday lenders have set up shop a block away from the homeless shelter and a social-service agency - location, location, location.
We pass laws to protect consumers from tainted meat and toys made with lead paint. It's time to add payday lending to the same list.
Source : http://www.desmoinesregister.com/