shlep: the Self-Help Law ExPress

  “Payday loans” must really be addictive (like consumer activists insist), ’cause I couldn’t keep myself from writing about them again today (see our post on Jan. 11; update, battles everywhere over payday loans, Feb. 23, 2007).  Here’s a temptingly neutral definition from Payday Loan Times (a website that is discussed below):

A payday loan [or “payday advance“] is a short-term cash loan (usually between one and two weeks), issued to consumers. It is expected that the borrower will repay the loan after receiving his/her next paycheck. Unlike a traditional loan from a bank, there are no credit checks run on the applicant. Loans are usually issued in less than 24 hours, and are around $500. Payday loans can be obtained in person, via fax, or online.

In its Feb. 2000 Consumer Alert, Payday Loans = Costly Cash, the Federal Trade Commission explains further how payday loans work:  “Usually, a borrower writes a personal check payable to the lender for the amount he or she wishes to borrow plus a fee. The company gives the borrower the amount of the check minus the fee.”   Also called cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans, such payday loans are being advertised everywhere (on tv, radio, and the internet) as an easy way to “tide yourself over” until your next paycheck.  However, here’s how they quickly become so expensive:

“Let’s say you write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115 in cash, or you roll-over the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.”

  The Center for Responsible Lending says that payday loans cost American families 4.2 billion dollars a year in excessive fees.  CRL has a good discussion of possible alternatives to payday loans, including “small savings accounts or rainy-day funds; salary advances from employers; credit card advances; working out extended repayment plans with creditors; and loans from friends, relatives, religious institutions, or social service agencies.  In addition, many lenders have developed lower-cost alternatives to payday loans that have better repayment terms.”   Of course, consumers likely to use payday loans often have no prior credit history or an awful one, and can’t turn to sources of credit that middle class Americans take for granted.  Industry members and their legislative supporters explain, therefore, that they are providing a necessary service at a rate commensurate with the risk they are taking.    Consumer advocates disagree.

According to the Center for Responsible Lending, 99 percent of payday loan consumers are “chronic borrowers”, who are the most vulnerable consumers, and the loans are structured so that the borrower is consistently in debt to the lender.   For this reason, there have been calls for tighter regulation from many sources over the past decade.  (See, e.g., the 1998 article from Bankrate.com, Officials call payday financing “loan sharking,” and last week’s lengthy and useful piece “Payday Loans Due for a fall?,” Jan. 10, 2007, in the Richmond Times-Dispatch.) CRL has state-by-state information on legislation, contacts and news. The Center believes that Georgia’s payday loan regulatory scheme is a good model for the nation.

In the last Congress, a bill was proposed that would have protected unscrupulous lenders and weaken consumer protections, despite calling itself a The Responsible Lending Act. Many expect the new Congress, with Rep. Barney Frank in the lead, to move forward with genuine payday law reforms at the federal level.

  Since October 2006, the federal government has capped interest rates at 36 percent on payday loans for military personnel – “for security reasons,” apparently because a borrower deeply in debt might be too susceptible to bribery and too tempted to commit an act of treason.

   I’m intrigued by the internet journal mentioned above, Payday Loan Times.  On the one hand, it admits the transactions are controversial and promises to “take a look inside the business as never before, providing people with an opportunity to see what is really going on — and to draw their own conclusions.”  It has testimonials that are balanced between pro and con borrowers; its glossary of terms is useful; and it presents postings such as “Utah councilwoman focuses on payday advances” (Jan 10, 2007), which is an informative look at the campaign of Salt Lake City mayorial candidate Nancy Saxton, who wants to limit the number of such businesses in the city.

 On the other hand, the most prominent item at the top of every page of Payday Loan Times is a large ad in the main column of the website, featuring a lovely, smiling young woman, awash in cash, offering Immediate Loans up to $1000, with links to U.S. states and Canadian provinces.  Also, although articles under its Advice Category include information from sources that are anti-PDL, I’m a bit concerned that the piece “Advice for Taking Out Payday Loans” (Dec. 21, 2006) starts by saying “Don’t listen to the nay-sayers,” and seems to suggest in Tip #2 that you might be able to save money by consolidating high-rate credit card debt into a payday loan.  Is your consumer advocate Editor too suspicious or rightfully suspecting of the motives behind Payday Loan Times?

•  There’s no dispute, that last month’s PDL article in the satirical newspaper National Nitwit is funny: “Nation’s Crackheads Rate Check-N-Go Top Fast Cash Site” (Dec. 14, 2006)

On its Consumer Resources page, the Center for Responsible Lending has links to many resources to help you educate yourself on payday loans, ask the right questions of lenders, and find governmental or legal assistance.  As with most consumer issues and legislative debates, good information and common sense can help you come to wise conclusions.  Here are a few more points and resources that might help you think more clearly on this topic:

• This UK Payday Loan website has lots of information for anyone considering a payday loan, explaining pros and cons.  As Payday Loans Times notes, the site states that the typical PDL borrower is not impoverished, but is instead middle-class, especially women, with nurses and teachers are the most common borrowers. [That might not be very surprising, since you need both a paycheck and a banking account to get a payday loan, and the most impoverished often do not have them.]
•  An editorial in the Deseret [Utah] Morning News, “Rein in Payday Lenders” (Jan. 12, 2007) says, in part: “The payday lending industry will tell you it provides a needed service. Its customers lack access to traditional forms of credit and have such poor credit histories they cannot obtain loans or credit cards. . . .  But these lenders exact a big price for this convenience.  In Utah, payday lenders charge an average of 521 percent interest. . . . While some may grouse about government placing onerous restrictions on a legal business, there are many legitimate concerns about how payday lenders operate.  No question, they should be able to make a reasonable profit because they serve a clientele that others reject. However, they should not run roughshod over customers just because they can.” 
• Consumer Federation of America’s Payday Loan Calculator can help you calculate the real interest rate on a loan. 

shlep muses: Doing away totally with easy-to-obain, short-term loans is not a totally desirable result.  Limiting the amount of interest and service charges to reasonable levels would make more sense, and help assure the loans are in fact paid back promptly.  Of course, many members of an industry that thrives on super-high interest rates may be unwilling to stay in the business at merely reasonable rates.   Would their exit hurt or help our most vulnerable and uninformed consumers?

• update (Jan. 15, 2007): Thanks to Greg Worthen at Public Defender Stuff for including this posting in Blawg Review #91.  BR91 is a special Martin Luther King Day edition, and Greg says: “Hosting Blawg Review on MLK Day is a very special honor for me. Dr. King is one of many influences in my life that have led me not only to do the job I do, but to create Public Defender Stuff. Providing whatever support I can to the attorneys who fight for justice for those who otherwise would be on their own is the best way I know to honor Dr. King’s memory, his life, his Dream. Our Dream.”