The growth of payday lending in this state has been phenomenal. Since the Legislature allowed certain businesses to offer short-term loans at high interest rates in 1995, payday loan offices have sprouted faster than even Starbucks shops in Washington. The industry is thriving.
Its customers are another story.
Examples abound of low-income folks who get trapped in a debilitating cycle of borrowing just to pay off previous loans. At annualized interest rates as high as 390 percent (you read that right, there’s no decimal point), breaking free can take years.
In fact, the payday-lending business model appears to depend on such cycles – a practice known as loan flipping. According to the national Center for Responsible Lending, 90 percent of payday lending revenues are based on fees charged to trapped borrowers. The CRL estimates that because of loan flipping, the typical payday borrower pays back $793 for a $325 loan. It’s legal, and it’s shameful.
Last year, Congress voted to protect military families from such predatory practices, capping short-term interest rates on loans to military personnel at 36 percent, banning the practice of holding post-dated checks as collateral, and prohibiting mandatory binding arbitration, which leaves borrowers with little or no legal recourse. That law takes effect in October.
Similar protections should apply to everyone, and legislation has been introduced in the state House to do that. House Bill 1021 would cap interest rates at 36 percent, extend loan periods from the current maximum of 45 days to a range of 90 to 120 days, and allow consumers legal recourse in disputes.
Payday lenders say they can’t make it under those rules, especially the 36 percent cap. If that’s true, it really means they can’t make it without taking advantage of low-income borrowers already struggling to make ends meet.
If payday lenders disappear, commercial banks and credit unions will need to step up to offer short-term loans. The North Carolina State Employees Credit Union has been offering an alternative to the current payday lending model since 2001, and has found it profitable. It offers consumers a checking account with a linked line of credit at an annual interest rate of 12 percent, or a flat fee of $5 for a 30-day loan of $500. According to estimates by the Brookings Institution, 89 percent of the payday lending fees paid in Washington in 2005 could have been saved if the North Carolina option were available here.
It’s time for the Legislature to fix the problem it created in 1995. If payday lenders can’t survive without preying on the vulnerable, we’re better off without them.
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