California isn’t one of those states. A bill here died in committee last session, and sponsor Assemblyman Dave Jones, D-Sacramento, hasn’t decided yet whether he will try again next year.
In 2006, Congress capped rates on payday loans, as they are commonly known, made to military personnel and their families. Authorities limited such loans to 36 percent, worried that the mounting debt of service men and women put national security at risk.
Without that cap, a loan that is not paid off at the end of two weeks can potentially generate fees that translate to triple-digit interest rates.
Asked if he favored an interest rate cap, local West Coast Cash customer Ricky Squires, 60, initially said yes.
But when told the industry says that would drive them out of business, Squires backed away.
“It’s probably a good idea, but if it puts them out of business, I don’t think they should do it,” he said.
Over the last two years, 15 states and the District of Columbia have limited interest on payday loans to civilians. They are Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia.
In Arizona and Ohio, the caps have been challenged, and voters will have an opportunity to weigh in on whether the laws should stand.
HURTING THE POOR?
Critics of payday loans say they are money pits that prey on the poor.
“These loans totally trap people in a cycle of debt that they can’t get out of,” said Ginna Green, a spokeswoman for the nonprofit Center for Responsible Lending.
The Community Financial Services Association of America, a national payday loan industry trade group, argues that fees for the initial loan are reasonable, and people who pay on time don’t get into trouble.
Under current law, Californians pay a maximum fee of $17.65 per $100 borrowed for two weeks. That translates into annual interest of 460 percent.
It’s that annual figure that troubles opponents.
“Borrowers don’t pay them off on time,” Green said. “They carry them over, and the debt gets bigger and bigger. The industry says it’s about choice, but nobody chooses to owe $3,000 on a $300 loan.”
An average payday loan in California is 16 to 18 days, according to the California Financial Service Providers Association, the state’s payday loan industry trade group.
A WAY TO MANAGE
It’s easy for middle class bank customers to dismiss payday loans, but they provide a desperately needed service for low-income workers who don’t have a lot of options, said Mark Thomson, director of government relations and compliance officer for Moneytree.
“You have to realize that our relationship with debt is different,” said Thomson, who serves on the state trade association’s legislative committee. “You or I walk into a Best Buy, see a $1,700 flat-screen TV, and decide we don’t want to finance it. Without that loan, nothing changes in our daily life.
“For most of our customers, some adverse event is going to happen. They are going to bounce a check, or their utilities are going to get shut off, or they have to get a car out of the shop so they can get to work.
“There’s already something about to happen to them, and they’re trying to find the cheapest way they can to manage it.”
Payday loans are one way to do that. For some, it’s the only way, because they don’t have good credit and can’t access a credit card or a loan from a traditional bank, Thomson said.
If payday lenders go out of business, subprime borrowers will have nowhere to turn, and with a 36 percent cap, California’s payday loan industry will die, Thomson said.
Profit margins are low already, he insisted. Fees are just high enough to cover loan defaults and the cost of doing business.
Consumer Credit Counseling Service of Kern and Tulare Counties is a nonprofit organization that helps borrowers get out of debt and offers budget management classes.
CCCS doesn’t have an official position on capping payday loan interest rates, but it advises clients not to borrow from payday lenders, said president and chief executive Katy Hudson.
2 comments:
I am in complete agreement with Mark Thomson. What he is saying makes actual sense. Seriously, how is it good business practice to offer a product at a ridiculously low rate so that you can't even cover your employee payroll, benefits, and other fixed expenses.
Of COURSE payday loan fees are going to seem exceedingly high when comparing them to annual credit products! But it doesn't make sense to do that because they are NOT annual products - they are offered in 2 week terms. So let's go backwards and see what annual product fees would look like when offered in two week terms:
A $100 bounced check with $55.59 NSF/merchant fee is 1449% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR; $29 overdraft protection fee on $100 is 755%.
I hope this helps to put things in perspective for your readers.
To add to what Sam said, at a 36% APR, the total fee charged on a $100, two-week advance would be $1.38. Payday advance lenders could not cover the cost of originating a loan, let alone cover basic business expenses. Ultimately, a 36% APR cap would eliminate an affordable short-term credit choice for consumers.
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