Payday loans are small-dollar loans due on a borrower’s next payday. In Minnesota, the average payday loan is $380 and, over two weeks, carries a finance charge that computes to 273 percent.
One could overlook this exorbitant interest rate if borrowers took out one loan, climbed out of debt and walked away satisfied. But that is not the reality surrounding this predatory-loan product.
Instead, here’s what hundreds of customers have told us in surveys, focus groups and interviews: Payday loans don’t solve financial pressures, they make them worse. The exorbitant fees make the next month’s bills impossible to pay, which is why customers often need another loan right away, setting the debt trap.
Last month, the Minnesota Legislature heard testimony from a Payday America customer in debt for 15 months at triple-digit rates because she needed her monthly disability income a few days early. When she couldn’t afford the borrowing cost, she immediately took out another loan — and the next month another. She is trapped, losing $35 of precious income each month, and she still owes the principal.
Another testifier, from Duluth, told legislators how she became trapped and how payday loans almost ruined her life. She first took out a $150 payday loan to buy Christmas gifts and ended up, several years later, paying more than $4,000 in fees. She remains deep in debt and now has to contend with a court judgment courtesy of Payday America.
How do lenders set the debt trap? First, the industry does virtually no underwriting to measure a customer’s ability to repay the loan. Proof of income and access to the customer’s bank account is good enough, without regard to debt or expenses. Second, the industry has no limit on the number of loans or the amount of time for which they charge triple-digit interest.
Minnesota Commerce Department data show payday-loan borrowers take an average of 10 loans per year and are in debt for 20 weeks or more at triple-digit annual percentage rates. By the end of 20 weeks, an individual will pay $397.90 in charges for the average $380 loan. It’s even worse for the 15 percent of borrowers who take out 20 or more loans per year.
One prominent Baptist minister, recalling the Bible’s teaching on usury, called payday lending “the bait with an unshakable hook.”
Payday loans were illegal in Minnesota until 1995. Then the industry elbowed its way in. The industry grew slowly at first, but now it’s a growing problem. Payday lending doubled in the past five years, ensnaring thousands of our neighbors. Since 1999, it has drained more than $82 million from household budgets. In 2012, Duluth borrowers spent more than $218,000 just on payday finance charges.
Sixteen other states and the District of Columbia know better. These states never allowed payday lending, or their regulations effectively ban it. The state of Georgia made payday lending a crime. Five other states have placed careful restrictions on this type of loan. We with Minnesotans for Fair Lending (fairlendingmn.org) propose that Minnesota join this group.
Minnesotans for Fair Lending is seeking two things this legislative session: reasonable underwriting and a limit on the amount of time lenders can keep a borrower in debt at triple-digit interest rates. We applaud state Sen. Roger Reinert of Duluth for his recent amendment that would impose a 45-day cycle-breaker between payday loans.
The industry claims our proposal will drive people to the Internet or to loan sharks. Both claims are false. States that ban payday lending do not have higher rates of Internet borrowing. And loan sharks: There hasn’t been a loansharking prosecution in Minnesota since 1939. But then again, what exactly do we call lending at
273 percent interest?
We are not seeking to ban payday loans. The industry still lends in Washington and Delaware, two states that use reasonable regulations to tame this predatory product into what the industry claims it to be: access to small-dollar credit — but without the debt trap.
Brian Rusche is executive director of the Minneapolis-based Joint Religious Legislative Coalition (jrlc.org) and serves on the steering committee of Minnesotans for Fair Lending. He wrote this at the request of the News Tribune.