Predatory Lending? Guilty as Charged

Contrary to traditional loans, payday loans are far different. Traditional loans have interest rates regulated by the federal government, installment payments, and oftentimes months or even years to pay the principal loan and interest. There are no federally imposed guidelines for payday loan agencies, yet individual states are responsible for their regulations. Currently, 13 states have either banned or limited the amount of interest payday loan agencies are allowed to charge consumers.

It is easy to see how the structure of payday loans are different from traditional loans based in large part on the criterion for borrowers. There are no extensive background or credit checks required by banks when borrowing money. Conversely, in most states, payday loans are restricted to the amount of money they are allowed to lend (usually not more than $1000.00), whereas banks are not restricted depending on the borrower’s credit worthiness and ability to repay, which is certainly not factored in with payday loans. Because of these very loose guidelines, consumers are able to borrow from multiple payday loan agencies simultaneously.

The Center for Responsible Lending estimated that payday loans are costing borrowers approximately $4.2 billion in predatory fees annually. Looking at this social problem on a local level, Louisianans are paying $311 million annually, which is third only to Missouri ($317 million) and California ($365 million). The typical loan amount in Louisiana is $325 with a 560% average percentage rate (APR). Payday loans generally carry APRs between 391 and 443 percent. Some of these loans can exceed more than 700% interest depending on consumer usage.

Unlike traditional loans, payday loans are designed to be renewed. However, loan renewals have been the catalyst for the $28 billion industry. The Center for Responsible Lending posits that the one-time two-week loan that payday loan agencies advance borrowers is virtually nonexistent. Ninety-one percent of payday loans go to borrowers with five or more loan transactions per year. Borrowers oftentimes return only to pay the interest on the original loan to renew it until their next payday. The typical payday borrower pays back $793 for a $325 loan. Ultimately, these agencies make their money on repeat and/or renewed business—not those customers who borrow the small amounts of money needed in emergency situations and completely rid the debt within the next pay period.

According to the Cable News Network (CNN), there are more payday loan agencies located in California than McDonald’s franchises. As of May 2008, Louisiana has approximately 998 payday loan agencies throughout the state that are registered with the Office of Financial Institutions. How that stacks-up against McDonald’s franchises is unknown. We could use Lafayette, Louisiana to paint the picture. To provide some idea of what Lafayette looks like, the US Census reports that as of 2006, there are about 115,500 people within the city’s limits. There are four McDonald’s locations with addresses in Lafayette, with quite a few more outside the city, but within driving range. Conversely, Lafayette has 36 payday loan agencies listed on the state’s registry. Using basic mathematics, there are approximately 28,500 people for every McDonald’s location in Lafayette compared to about 3,200 people for every payday loan location in the same city. Given these nonscientific data, it is assumed that Louisiana and California have something in common, which is probably the case for a number of other states.

Some people may feel forced into borrowing money from these predatory lenders for a number of reasons, such as a last resort to keep the lights on or to put food on the table. As a result, consumers assume a certain level of responsibility with payday loans. These predatory lenders are in business to make money. The more individuals patronize them with continued loan renewals and new loans, the more of a financial trap the consumer builds for him- or herself. Borrowing from one payday loan agency to pay another is simply a bad idea. Use them responsibly or you may become a self-imposed victim of an avoidable predator. © 2008 Keydron Guinn