Payday Loans: Still Popular, Still a Raw Deal

Payday loans are a $7.4 billion-a-year business, despite tough regulations in 22 states that ban them or limit interest rates.

Maybe that’s not so surprising, given that a majority of Americans (55 percent) live in the other states, some of which still allow these lenders to charge more than a 500 percent annualized interest rate and net $20 per $100 borrowed on a two-week payday advance loan.

More surprising from a new Pew Charitable Trusts study on payday loans is the most common borrower: “Employed, white, female, and 25 to 44 years old.”

The heaviest users of payday loans earn less than $40,000 a year, rent their home, lack a college education, or are African-American. They’re more likely to get stuck in a payday loan cycle: borrow hundreds for what they can’t afford, get paid and repay the loan plus crazy fees, then borrow again because they have less than before.

As Pew explains it, “an average borrower is in payday loan debt for five months per year, using eight loans that last 18 days each.” The average loan size: $375. The average interest paid across eight loans: $520.

More than 1 in 20 Americans have used a payday loan in the past five years – even though most of them know better. Only 16 percent sought the loans for emergency expenses. Most ignore cheaper alternatives and avoid smarter spending.

“If payday loans were not available to them, 81 percent of borrowers reported they would cut back on other expenses instead,” Pew says. “Majorities also would delay paying bills, borrow from family or friends, or sell or pawn possessions.”

In addition to those ideas, consumers could try these alternatives from the nonprofit Center for Responsible Lending…

• Work out a payment plan with creditors
• Ask for an advance at work
• Find a community-based emergency assistance program
• Get a loan from a credit union
• Get a cash advance from a credit card
• Turn to small consumer finance companies, where rates average between 25 and 60 percent

If you know anyone who uses payday loans, encourage them to investigate cheaper options and consider credit counseling to find a way out of the debt cycle – because the payday lending landscape doesn’t look any better now than it did in 2010.

We last wrote about payday lending in Payday Lenders Dropping Like Flies, just over two years ago. At the time, things were looking hopeful: Arizona had just made the practice unprofitable, and lenders were abandoning the state. The newly created Consumer Financial Protection Bureau was poised to crack down on lenders who were estimated to be raking in more than $4 billion in fees.

In mid-2012, Pew tells us these lenders are bringing in $7.4 billion off the backs of the working poor. Major banks such as Wells Fargo and Regions (which are largely exempt from the laws applying to payday lenders) are getting in the game and making loans with annual rates that come out to more than 300 percent, according to The New York Times. They deposit the funds into the customer’s bank account, and when time’s up, they suck them back out – plus fees. If you don’t have funds to cover the withdrawal, too bad. You’ll just have to pay the bank for the overdraft charges they just caused, and keep paying until you have a positive balance.

Meanwhile, Congressmen such as Joe Baca (D-Calif.) are trying to introduce laws that could potentially open the floodgates of predatory lending by bypassing the CFPB and blocking state-level consumer protections. The Center for Responsible Lending has more details about Baca’s proposal, HR 1909, which hasn’t been considered by Congress yet.

In the past year alone, Baca has received $22,400 in campaign contributions from the finance/credit industry – $15,750 from commercial banks and $30,600 from uncategorized lobbyists, according to OpenSecrets.org.