Payday Loans With Four-Digit Interest Get Thumbs-Up From Some Lawmakers


Payday loans function as the last resort for Americans in tough economic times to get a quick infusion of needed cash for overdue bills, sudden medical expenses — or even to buy a gift for a loved one on a birthday or anniversary. But payday loans, from lenders who generally operate out of no-frills storefronts in lower-income and poor neighborhoods, can create more far worse problems than they solve with massive interest rates that would make even the big credit card companies ashamed.

That is why payday loan companies are often referred to as “predatory lenders.” They prey on the desperation of hard-working people who still can’t make ends meet thanks to poor wages from low-paying jobs.

Now lawmakers in two states want to give predatory lenders even more liberty to charge debilitating interest rates to borrowers who often are out of options simply to keep the lights on.

Over the next decade, experts project that one of every four Americans will be stuck in a low-wage job, the kind that though it requires full-time hours, pays an hourly rate at or below the federal poverty level.

That’s where payday loans come in — taking advantage of people who need cash fast and have no other legal way to get it. Each year, about 12 million people take out payday loans according to one recent study.

A different study looked at why individuals take out payday loans. The number one reason, at 69 percent, was simply to pay regular bills. After that, in a distant second place with 16 percent, were people who take out payday loans to cover unexpected emergencies. Paying for special occasions was third, with only eight percent resorting to payday loans to pay for gifts, vacations, and so on.

In other words, seven out of 10 payday loan borrowers, or about 8.4 million Americans, resort to payday loans simply to make ends meet. And each one of those Americans will pay the payday loan company $520 in interest and other fees for every $375 he or she borrows — an effective interest rate of 1,387 percent.

While paying that much interest can be crippling for families with no other options than to take out payday loans, lawmakers in at least two states are pushing to allow those interest rates to soar even higher.

In Pennsylvania, which is one of 15 states that currently ban payday loan companies by capping interest rates at 24 percent, Republican legislators Chris Ross and Pat Browne have introduced a bill to lift that cap.

In Missouri, rates are now capped at 75 percent of the total loan — an effective annual interest rate of 1,950 percent for a two-week loan. Republican State Senator Mike Cunningham has introduced a bill to lift that limit — in a state where 2.34 million payday loans were issued in 2012.

On the other hand, in Alabama, several pieces of legislation from both Republicans an Democrats aim to place caps on payday loan interest rates at rates ranging from 30 percent to 36 percent annually.

But the lenders complain now that if rates are capped, they won’t make enough money.

“It would be virtually impossible for us to operate a storefront at that rate,” Buck Wilson, of Modern Financial Services — a group that represents the interest of payday loan companies in Alabama — said, warning that desperate borrowers would then be sent into the hands of illegal loan sharks, who are the main competition in the payday loans industry.

[Images: Shaun Wilkinson / Shutterstock and taberandrew via photopin cc]

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