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Payday loans: The trap escalates

Posted by Stephen on May 22, 2007

Editorial published by: Roanoke Times

The good news is fewer Virginians borrowed from payday lenders in 2006. The bad news is they ran into even more trouble with more loans.

Payday loans work just as state lawmakers claim — for about 10 percent of the borrowers. For the other 90 percent — some 386,598 Virginians in 2006 — the system sucks them in the same way neighborhood loan sharks did back in the day. Today’s borrowers may not get their legs broken, but they sure endure the pain and agony of rapidly escalating debt.

State lawmakers blew a chance in their most recent session to prohibit these loans or at least cap them with acceptable interest rates. As it is, with annual percentage rates reaching 782 percent, these loans are nothing short of usury.

On the campaign trail, lawmakers should be asked to explain their position on payday loans, as this topic will surely face them again come January.

Voters should get ready for half-truths and deceptions. Lawmakers will point to the state’s latest report and say that the marketplace is working, and people are figuring out themselves that payday loans might not be right for them. As evidence: 12,354 fewer Virginians in 2006 turned to payday loans.

But that avoids the larger truth. The industry still saw the number of loans and amounts increase substantially despite fewer borrowers: 433,537 Virginians made nearly 3.6 million loans worth more than $1.3 billion.

To support these numbers, the industry lured in most of the borrowers so that they had to roll one loan into another — at an average $45 fee per pop. Some 96,831 people were so trapped that they took out more than 13 loans. And 12,486 Virginians — that’s 38 percent more than in 2005 — were sued by payday lenders.

But lawmakers don’t want to see those people. Instead they concentrate on the minority of borrowers who take out just one loan.

They posture that these loans fill a real need when people are short on cash and hit a financial snag just shy of payday. Lawmakers like to pretend this, because they, too, have benefited from the phenomenal growth of the industry.

Since the General Assembly legalized this brand of loansharking, campaign contributions from lending and consumer credit companies rose from $72,260 in 2002 to $399,776 in 2006, according to the Virginia Public Access Project.

And, unlike the industry’s borrowers, lawmakers don’t ever have to worry about paying the money back.

Except, of course, through their votes.

Opinions expressed in editorials do not necessarily reflect those of management of Conservative Viewpoints.

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7 Responses to “Payday loans: The trap escalates”

  1. Phil said

    I understand that we need to protect the consumer from unscrupulous lenders. We have to protect those people who never learned about handling finances properly. Also, we need to protect the mentally challenged from themselves. Saying that, your claim of 700% interest is a slight misnomer. You are not describing interest.
    If you get a mortgage, you must pay for things like title insurance, recording fees, closing costs, appraisal fees, etc. Those fees can amount to thousands. If you held that mortgage for only two weeks, and then utilized those fees to calculate what rate you actually would pay over a 52 week period if you got a new mortgage every two weeks,and then call those fees interest, then you could arrive at your 700+% interest rate. In the same manner, if you take a two week loan for $100, and have a $15 dollar filing fee, you will arrive at that high rate. If the interest rate is 30%, you would pay $1.15 in interest for the period, $30 for the year.If you take out a two week loan every two weeks for $100 you would only pay the same $30 in interest, but you would have paid $390 in fees. That would be very poor money management. It would amount to $420 in cost to borrow that same $100.
    Clearly a lender needs to pay for the expenses involved in making that loan. He has to pay for the credit check, among other things. Logically he must recoup that expense from the borrower. But if a borrower is reborrowing the same money, I am sure the lender does not need to have new credit checks. Those costs could be eliminated for subsequent borrowing. The $15 dollar charge could be minimized.
    What we don’t want is organized crime figures lending the money. They charge a “vig”. That means they charge the high interest and a service fee. They are also a bit more brutal in their collecting machinations.
    There is a need for short term loans. We have to balance the needs of the consumer, with the costs to the lender.

  2. First, I should clarify that this was an editorial in the Roanoke Times that I republished here. That’s important because the APR is more like 397% and rises to up to 510% with Title Lenders.

    That said, your breakdown of interest variance and application is noted. However, there are a few things we can keep in mind in regards to payday lending. First, let me dispel any concerns that the lender pays any fee whatsoever for a credit check. Payday lenders, under no circumstances, check credit. The only time payday lenders deal with credit agencies is after they turn a defaulted loan over to a collection agency.

    The bottom line is; when a customer takes 9 consecutive loans at $200 dollars per loan they have payed $2070 dollars and still have not payed a dollar toward the principle. They still owe the $200 dollars. That is the cycle of debt that exists. That’s what happens when things like Debt to Income Ratio’s (DIR) are not used.

    I agree that there is a market. First, this industry does not provide a service, it exploits a need. Second, many people didn’t get into this level of financial crisis over night and they will not get out of it through a quick loan scheme like this. It takes money management. Finally, I just want payday lenders to be in line with every other lending institution in America. There’s a 36% cap on interest for those lenders and the same should exist for payday lenders. If they can’t make money then they can pull up stakes and leave town. The free market will provide a solution. That’s the beauty of our economy. We are already seeing the market make a statement. For example, there are new products being created and introduced as we speak that will provide viable alternatives such as lines of credit, and short term loans that credit unions and non profits will be rolling out to counter the destructive force of this industry. They are waiting for one simple change in Virginia law…the repeal of the payday lending law or a hard cap on interest rates.

    I am a little disturbed with comparing this practice with a mortgage loan. The process, what drives the home mortgage market, and the qualifications are so incredibly different that it is not an apples to apples comparison. In fact it’s not even fruit to fruit…

    In my work on this issue I have offered several alternatives, in writing, to the industry and political leaders and they have all been rebuffed. So be it. I have first hand knowledge of this industry and I will stop at nothing short of interest rate caps or repeal. If they don’t want to play by the rules of decent business and society, than they can take their ball and go home…

  3. Joey said

    First, in regard to the fee discussion, the typical payday loan fee is $15 per 100, and since the majority of the loans are re-paid in 2 weeks or less, the use of an APR is misleading. Additionally, many payday lenders do use some type of credit information from companies such as Teletrac or Veritec to verify customer information, and check credit history.

    For many people payday loans are the most cost effective option they have available. When comparing the cost of a payday loan at $15 per $100 to the cost of a bounced check (around $54, with bank and retail fees), a late credit card fee of $35, or a utility reconnect fee of $50, the payday loan is by far the best option.

    Capping the fee at 36%, as you suggest, would basically eliminate the choice of payday loans for consumers. At 36% APR, the fee on a $100 loan for a 2 week advance would be $1.38, which would make it an unviable business at any volume, which is why banks or other lending institutions don’t make loans this small. This cap would force the people that need these loans to turn to higher cost options, such as off shore internet lending, title pawn, or bounced check fees.

    Eliminating the product is not going to eliminate the need. I agree that there are some people that do abuse this product, and that get into financial trouble because of it, but since the majority of people who use the service do it responsibly, would it be reasonable to take this option away?

    As you said, the free market will provide a solution, but, incorrectly you state there are alternative products waiting for the law to be repealed. If these products are a better solution for customers than payday loans, then why are they waiting? As a resident of Georgia, where payday loans have been basically outlawed for some time, the only new options we have seen is an influx of title pawn lenders, pawn shops, and advertisements for internet lenders.

  4. Joey said “many payday lenders do use some type of credit information from companies such as Teletrac or Veritec to verify customer information, and check credit history.”

    The only, and I mean only, check that is made is to see if they have defaulted and are still in an outstanding state with a payday loan and if they are in bankruptcy preceedings. They do not check credit ratings and they do not report to credit agencies. In Virginia to do so would be a violation of the law here. This industry prides itself in avoiding credit checks and they do so to attract the highest risks possible because they are the easiest to exploit.

    Joey said “For many people payday loans are the most cost effective option they have available. When comparing the cost of a payday loan at $15 per $100 to the cost of a bounced check (around $54, with bank and retail fees), a late credit card fee of $35, or a utility reconnect fee of $50, the payday loan is by far the best option.”

    This is a stale argument that comes right out of Payday Lending Headquarters. In a sense these statements above make my case for me. Due to the ridiculous fees being charged, the industry provides what might seem like a service when what they are actually doing is dressing them in sheeps clothing while clearly exploiting the problem the customer has. Yes, the customer would be better of dealing with difficulties instead of being trapped in a cycle of debt that will go from the quaint 15 dollars per 100 that is mentioned above to, say, over 2000 dollars spent on a 200 dollar loan that the customer has been forced to take week after week becauase they cannot keep up with the fees incurred. That’s what happens when a debt to income ration is not taken into considertation. That’s what happens when they are allowed to approve a person for a loan that equals the customers paycheck up to 500 dollars. That’s what happens when an industry goes unchecked are are able to exploit customers in the name of the free market.

    Joey said “Capping the fee at 36%, as you suggest, would basically eliminate the choice of payday loans for consumers.”

    GOOD! Payday lending is a lending industry and should fall under the same interest caps that the banking and finance industry must adhere to. If they don’t like it, the industry can rot on the vine, fall to the ground and die. The free market will provide a solution.

    Joey said “Eliminating the product is not going to eliminate the need.”

    This is true but instead of advocating exploitation, we should be in the business of creating financial health for people. Those in financial crisis didn’t get there overnight and no quick fix scheme, such as payday lending, is going to get them out of that fix. Sometimes it simply takes good ole money managment and the help of Consumer Credit Counseling or some other organization that will assist in assistance rather than usery.

    Joey also mentioned Georgia: Georgia is currently on the hot list of states that this predatory industry is trying to reenter. Payday lenders, like Joey, are passionate and relentless in their hope of placing themselves in a position to exploit as many people as possible. They make to much money on the coat tails of those that are struggling for them to give up and go away quietly.

    Joey insinuates that there are no better alternatives, another favorite ploy be the predatory industry of payday lending. Unfortunately, the attempt makes no better point for maintaining usery than any other argument provided by Joey or the industry. I was in attendance as three separate organizations talked of rolling out products that will take the place of payday loans. It’s not a matter of waiting, it’s a matter of managing their product better then the payday lending industry has done. Why wait? If I were them I would wait to be sure that personal debt will not continue to spiral out of control as a result of payday loans. Payday loans continue to put pressure on all financial instiutions to come up with ways to counter the damage this industry is doing.

    It’s simply time to put this experiment to rest and acknowledge that it was/is a failure. Payday Lending has been identified as exploitive in every location and in every state they have entered. We can do better than that in Virginia and I believe we will.

  5. Phil said

    Open your own Payday loan operation. Charge only 36% interest . Keep fees minimal. Maintain integrity. Have a credit counselor on staff. Limit repeat customers. Since you know when customers are getting loans elsewhere, cut them off after they get other loans. Let them know you are consumer oriented, not profit driven. If there is a need, fill it.Then you will get your profit.

    “Build it and they will come.”

    Give the consumer a viable option. I am sure you could create a business plan with your past experience. I am sure you could find start-up money.Put all your suggestions into action and reform the industry by example.

  6. Dev said

    Many of these people ran into more trouble because they didn’t weigh in on the situation they were about to get themselves into. They weren’t being responsible at all. I personally had to go to a payday loans once and it wasn’t even bad for me at all. Just as long as you pay on time there are no problems…

    • Isn’t it nice when a payday lender such as cash express writes in to add what I’m sure is an objective opinion…..

      As has been stated time and time again, the end game the predators like cash express create is a cycle of debt that has nothing to do with personal responsibility. You exploit people. It’s a disgrace but you get away with it because Virginia isn’t as strong as Ohio, North Carolina, Georgia and a growing number of states that are placing caps on YOUR usery practices. The world is closing in on predator lenders like Cash Express and the time is coming when you will die on the vine like other predators before you.

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