States target payday lenders and their high rates

Discussion in 'Economics' started by TraderTactics, Apr 8, 2010.

  1. PHOENIX (AP) -- When Jeffrey Smith needed some quick cash to pay a medical bill, he turned to a payday loan store near his home outside Phoenix.

    He eventually took out a string of payday loans and fell into a vicious cycle in which he would call out sick from work so he could drive all over town to pay off loans and take out new ones. The experience left him in bankruptcy, lying to his wife and fighting thoughts of suicide.

    Stories like Smith's and a growing backlash against payday lending practices have prompted legislatures around the country to crack down on the businesses.

    In the most severe case, Arizona lawmakers are on the verge of shutting down the entire industry in the state. A law took effect in Washington this year capping the amount of payday loans and the number that a borrower can take out in a year. And in Wisconsin, lawmakers are locked in a heated battle over whether to regulate the industry.

    Payday lenders say they are providing an important service, especially in a dreadful economy where people are short on cash. Detractors say the industry preys on desperate people with annual interest rates that routinely exceed 400 percent.

    "It's sort of like a twisted person that's standing on the street corner offering a child candy," Smith said. "He's not grabbing the child and throwing him into a van, but he's offering something the child needs at that moment."

    Payday loans are short-term, high-interest loans that are effectively advances on a borrower's next paycheck.

    For example, a person who needs a quick $300 but doesn't get paid for two weeks can get a loan to help pay the bills, writing a postdated check that the store agrees not to cash until payday. The borrower would have to pay $53 in finance charges for a $300, two-week loan in Arizona -- an annual interest rate of 459 percent.

    Payday loan stores are ubiquitous in Arizona, especially in working-class neighborhoods of Phoenix where the businesses draw in customers with neon lights and around-the-clock hours.

    Payday lenders in Arizona several years ago were granted a temporary exemption from the state's 36 percent cap on annual interest rates. The exemption expires June 30, and the industry says the interest cap is so restrictive that it will have to shut down entirely.

    Bills that would have kept the industry alive languished in the House and Senate, and the year's third and final attempt was pulled Tuesday amid a lack of support.

    Consumers frustrated with the economy "look for a dog to kick" because they're angry with the financial institutions they blame for the Great Recession, said Ted Saunders, chief executive of Dublin, Ohio-based Checksmart, a payday lender that operates in 11 states including Arizona.

    "They want to find a villain," Saunders said. And opponents "have done a good job of painting a big X on my back."

    Payday lending opponents say the industry depends on trapping some borrowers in a cycle of debt where they continually renew their loan or take out new ones because they can't afford to pay the debt while still covering their daily expenses.

    Eventually, the fees can surpass the value of the initial loan so the lender profits even if the borrower defaults.

    Industry proponents say the market has shown a need for short-term, small-dollar loans that aren't generally available from banks or credit unions, especially with traditional lenders being more conservative in the down economy.

    They say the industry supports working families that otherwise wouldn't have access to credit in an emergency.

    Supporters also say taking a payday loan is cheaper than paying a late fee or bouncing a check to cover emergency costs like fixing a car or keeping the electricity turned on.

    The voting public doesn't seem to be buying the argument.

    In 2008, voters in Arizona and Ohio soundly rejected industry-backed measures that would have allowed payday lenders to continue charging high annual interest rates.

    A group in Montana is collecting signatures for an initiative asking voters to decide whether to cap interest rates at a level that would doom the industry.

    "It's just a fairness issue," said state Sen. Debbie McCune Davis, a Phoenix Democrat who led the fight at the Legislature against payday loans. "I think when people work for a living they're entitled to have financial instruments that are ethical in the way that they operate."

    Industry backers say the election results aren't a good guide because many voters have no experience with payday loan services.

    "Our customers, they don't have much of a voice in these fights," said Steven Schlein, a spokesman for the industry lobbying group Consumer Financial Services Association of America.

    Arizona wouldn't be the first state to kick out payday lenders. North Carolina let lapse a temporary law authorizing payday loans, and the District of Columbia repealed its law allowing them.

    Ohio tried to cap interest rates at 28 percent, but some payday lenders have survived by using a state law allowing them to charge loan origination fees.

    The payday loan industry has succeeded in fighting back attempts in Congress to crack down on their business thanks to an expensive lobbying effort.

    When Arizona's law expires, executives have said they'll try to keep open some of their 650 stores in the state by stepping up their other lines of business, including car title loans, check cashing and prepaid debit cards.

    "The payday statutes will evaporate out of the books, (but) the demand doesn't go away," industry lobbyist Lee Miller said. "Capitalism abhors a vacuum. Entrepreneurs will come forward and try to find a profitable way to meet that demand."

    Associated Press Writer Paul Davenport in Phoenix contributed.
  2. The mushy part of me thinks it's terrible the way that the poor are preyed upon. The rational part of me thinks the poor are poor because they are terrible with money.

    If it's not payday loans it's retarded home loans like stated income IO's and NegAm's, or it's late fees and check cashing charges, or it's any thing else the poor waste their money on because they just aren't good with money. You can't legislate fiscal responsibility, because our legislators certainly don't have any.
  3. Most important line in that whole story. "When Jeffrey Smith NEEDED some quick cash...."

    This is the problem with people today. They think they NEED to pay that bill now. I mean...what possesses people to think they cant wait 2 weeks to pay a bill? They are giving up their wealth just so the hospital will stop calling them and asking for their money? Let them call. Tell them to wait. Tell them "you aint getting it until next payday, deal with it!"

    Payday loans are worthless to society. How much do they even loan to people? There is one by my house that says they loan "up to $400" $400 bucks? thats it? What the hell can you do with $400 bucks? They say the fees are 17.50 per $100 borrowed and their interest rates come out to an average of 485% per year. So someone that "NEEDS" to pay a $400 bill basically agrees to pay back $2,340 in interest plus another 400 in principal over a year. But hey...if you are lucky enough to pay it back the next payday it only cost you $140 bucks in interest.

    Why would someone agree to that? Why do people think they NEED to pay bills right away and cant wait 2 weeks?
  4. MattF



    must be the "morality" thing....most any 'smaller' bill takes at least 3 months before it would ultimately go to collections and subsequently get reported...or in utility cases it may just cause things to get disconnected and forcing you to pay it all then.

    On top of that, the companies will likely work out a small payment plan if need be.

    The stupidity in people sometimes...and I guess the smart capitalizing on it...
  5. TGregg


    So we're agreed? Some people are just too damn stupid to make their own decisions and need government to make their decisions for them. Any other decisions we'd care to remove from the hands of people who directly benefit or suffer from them, like trans fats, smoking, fast food, moving too far away from their family, exercise, getting insurance, etc?

    It's a brave new world.

    EDIT: Here's one I'd like to offer - how much house you can afford to buy. Recent experience shows that a whole lot of people have no $#^(ing clue how much money they can afford to spend every month on a house payment, nor WTF ultra advanced math principles like balloon payment and ARM mean. Obviously we need Uncle Sam (in his wisdom most awesome) to tell us just how much house we can buy.
  6. Yeah that is true, morality sometimes is an issue when it comes to these type of topics
  7. You just gave some politician a horrible, horrible idea. I bet we see this become law before Obama is out of office.
  8. i don't know if they do that there will be a load of people losing assets. this would make the other problem pension deficits worse. they can't really move either way.
  9. A lot of people "NEED" quick loans. I bet that "need" is most common on a Friday or a Saturday when the ability to say "no I can't go ____ because I can not afford it" is absent from the vocabulary of many of the people using the services.

    Are the people using the services paying to high a rate of interest? I don't believe so. To say that it is to high is to say you know better than the free market what they correct rate should be.

    I believe that in my town with a pop of about 70K people and maybe a dozen or more of the check/payday loan places competing for business that the market prices in what the service is worth. To say otherwise is to say that anti-competitive practices are taking place and that is a whole different topic.

    The rates are not high they are correct for the clients that use them. The people that are using them are free to get a loan from anyone else that will offer a better rate if they want to.

    People that want to take away these stores want to take away jobs and the ability for people to get money at their most favorable rate that they can. If you make it illegal the people using the services will have one last and maybe the only option available to them when they themselves feel that the price of interest is worth it to them.

    It doesn't matter anyway. Its not like you can save people from themselves. Like the kid that goes to school with my son. His parents bought a new plasma TV about two months ago and he gets free lunch from school because they "can't afford it". They are also getting kicked out of their apartment for being late with rent. Why does someone buy a new TV when they are behind in rent??? And more importantly to me why am I paying taxes that are being spent in part to provide lunch for some kids family when they have a nicer TV than I do??
  10. If there's something that should be regulated, they should go right to the root of it all. I see that the biggest cause of over consumption is the media. Mainly it's television with constant commercials telling people to buy as much as they can and more.

    If you really think about it, it's television that's destroying America, not Bush or Bernake or Obama.
    #10     Apr 9, 2010