I’m still driving around East Tennessee admiring the landscape…dotted with Payday and Title loan storefronts. You probably have one around the corner from where you live or drive by one on your daily commute. And if you haven’t noticed one yet, you will now. They are everywhere.
Next week, Rep. Jeanne Richardson (D-Memphis) will bring four bills to the Utilities & Banking subcommittee in an effort to reign in the excesses of the Payday loan business.
What are the excesses? 400% interest rate “loans” given to 19 million people per year, 12 million of whom get trapped in a debt cycle.
A couple of days ago we linked to a Harper’s Magazine must-read article about East Tennessee, the “birthplace” of this usurious practice, but their was one obvious piece of info missing – just what is the difference between “legitimate” lenders and the payday loan people?
The Center for Responsible Lending spells it out, “legitimate lenders assess the ability of potential borrowers to repay it. Payday lenders do not.”
In other words, the process behind the business of payday loans is configured purposely as a trap for borrowers. And not just a trap where it’s impossible to pay back the first few months of a loan (when the interest is higher than the principle) or keep up with a balloon payment. The Payday loan process is a trap that keeps the borrower paying what amounts to interest only month after month after month in a yearly cycle that adds up to 400%.
From the CRL:
To obtain a loan, a borrower gives a payday lender a postdated personal check or an authorization for automatic withdrawal from the borrower’s bank account. In return, he receives cash, minus the lender’s fees. For example, with a $350 payday loan, a borrower pays an average fee of about $60 in fees and so gets about $290 in cash.
The lender holds the check or electronic debit authorization for a week or two (usually until the borrower’s next payday). At that time the loan is due in full, but most borrowers cannot afford to pay the loan back and still make it to the next payday.
But if the check is not covered, the borrower accumulates bounced check fees from the bank and the lender, who can pass the check through the borrower’s account repeatedly. Payday lenders have used aggressive collection practices, sometimes threatening criminal charges for writing a bad check even when state law prohibits making such a threat. Under these pressures, most payday borrowers get caught in the debt trap.
To avoid default, they pay another $60 to keep the same loan outstanding, or they pay the full $350 back, but immediately take out another payday loan, with another $60 fee.
In either case, the borrower is paying $60 every two weeks to float a $290 advance – while never paying down the original amount of the principal. The borrower is stuck in a debt trap – paying new fees every two weeks just to keep an existing loan (or multiple loans) outstanding.
The Center is suggesting a 36% cap on annual interest to spring the trap. Here in Tennessee, the birthplace of this awful practice, we are asking only for a 100% cap.
Rep. Richardson’s bills are up next Tuesday, please call the members of the Utilities & Banking subcommittee and ask them to support reigning in the excesses of the Payday loan industry.
This is such a bogus article by people who don’t know their ass from a hole in the ground. Payday lending does not even involve an interest rate. The definition of interest is that funds accrue as a result of three factors time, principle, and a rate. Payday loans do not rely on time or a percentage rate. Payday loans involve a fee set by state governments. If I take out a payday loan for $200 in the state of TN I will payback $230 if I pay it back in 2 days or in 200 days. In the state of TN there are no late fees, no add-ons, and NO ACCRUING OF INTEREST. What a deal!
Just try it some time. Go get a loan and refuse to pay it back. You will always owe $230. Of course you will pay a bounce check fee if they deposit but that’s with any business. The crazy interest rate is an annualized rate that really can never come into play. The annualized rate only applies if you continually take out the loans every 14 days for a year but in fact nothing ever accrues. A responsible person, who takes out the loan and pays it off in the required amount of time (usually 14 days) pays $30 for the service. It does get out of control if the person continually uses the payday lender for loans but so do credit cards. What makes this better than credit cards for the irresponsible person is that in TN you are limited to $300 per loan and $500 total of all payday loans.
The biggest lie in this article is that banks lowered their standards to compete with payday lenders. What a load of horse shit! Banks are not interested in giving $300 loans. It’s not worth their time. In addition, banks are not interested in giving loans to people who continually overdraft their accounts and who need these loans on a regular basis. Believe me the rate of default is so high that it is very hard to stay in business, hence the fees. But no, some in this country want to protect the consumer from the evil business man even if they refuse to pay their bills.
The problem is the bunch of goodies who want to protect me and you from everything and everybody. Well, why doesn’t somebody start with the lottery? How about gambling, drinking, smoking, NCAA brackets and football boards, Game Cube, Cable TV, soft drinks, overpriced rims, loud overpriced stereos, and jealous socialist writers?
Check out Bob Corker and UT-Knoxville’s BFF:
http://www.opencongress.org/articles/view/1705-Meet-Sen-Corker-s-Payday-Lender-Friend
I think the interest caps are a good idea. But I don’t think this is so straightforward an issue as it’s made out to be. What’s the alternative for poor people with no credit who can’t make it until payday, if their car note is due, or their rent, or some other urgent need for cash? And can’t we believe that people can weigh the consequences for themselves? I’ve used these services – as well as – shock! – title loans on occasion because I haven’t had any alternatives. It’s been worth the $60 bucks to get the couple hundred. Yes, I do pay the whole loan back in one or two repayment periods, as do many people who need these services. Seems like a good move would be to make more low interest loan services available then you wouldn’t have a need for these…
Mary – Thanks for helping address this issue! We are doing a big push for this out of East Nashville, this is killing our residents over here, and creating that endless poverty cycle. I also want to attack from a business owner standpoint (since let’s face it, they will actually listen to that).
These businesses hurt other legitimate business in the urban core, particularly on central corridors (Gallatin Pk, Dickerson, Murfressboro, Nolensville). Their business practices of keeping people down, keep them running high profits, and they take over, detracting from property values for one thing, and interest for legitimate businesses to set up shop on main corridors. Thus the legislators are stopping business progress as well, by supporting only one type of business that is lining pockets. Is this the type of business’ basket to put your eggs in? Payday lending??
Bottom line, is this is simply shameful on behalf of the legislators. It is so obvious with what to do, but shameful they only care about the money. Even on the federal level, Senator Corker is trying to negotiate the financial crackdown by getting Senator Dodd to take out the payday lending crackdown. SHAME ON HIM!!!
Let us know how we can help. I will definitely send letters and make call, I am only one pest though…..