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.
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