Low income workers are struggling to make ends meet. The current recession has made things even worse, and living paycheck to paycheck is a reality in many households. "Payday lenders" have taken advantage of their struggle providing high interest loans that are repaid out of the workers' next paycheck.
Reasonable short-term loans can be helpful for a worker trying to deal with an emergency, but these payday loans frequently become a debt trap in which the borrower sinks deeper in debt due to high interest rates or fees. In some cases, this drives families into poverty and bankruptcy. That's why the Minnesota Commission on Ending Poverty recently recommended banning predatory loans that are not subject to usury laws.
People who borrow from payday lenders are not irresponsible. All of them have checking accounts. They have jobs. In many cases, the lender requires the borrower to give them authority to automatically withdraw the amount due from their bank accounts on their next pay day. As a result, there is little risk to the lender. In fact, the default rate on these payday loans in Minnesota is just over two percent – far less than the rate of default on credit cards.
Despite the low risk, payday lenders charge predatory rates. We are not talking twenty or thirty percent annual interest rates; they charge the equivalent of 300 or 400%, sometimes over 700% interest.
At the capitol, payday lenders have plenty of powerful lobbyists working to make sure we don't block their predatory practices. The lobbyists claim that these loans are needed for short-term emergencies, and the loans are only for two weeks. But the reality is that most borrowers cannot afford to repay the loans that quickly. They effectively roll over the loans every pay day. Nine out of ten payday borrowers take out at least five loans in a year. Well over half of all borrowers take out 12 or more loans per year – meaning most borrowers need the money for at least six months.
The typical worker who takes out a $100 payday loan and then rolls it over every payday for six months, will pay over $430 on the loan! If the loan amount is $300, in six months they will pay over $670. This may not sound like a crisis to those who have money in the bank, but when there is no food in the house and no money to pay for groceries, such a debt trap is devastating.
People in the military have been exploited by these payday lenders. The Department of Defense recognized the problem, characterizing payday loans as "predatory". The federal government recently adopted legislation prohibiting lenders from charging fees and interest above 36% per year to people in the military.
Other low-income workers need the same protection. When working people fall into poverty, taxpayers often end up paying the tab for their healthcare and, sometimes, their housing and other expenses.
Because of the lobbying clout of payday lenders at the Minnesota capitol, advocates for low-income workers knew that they had little chance of passing a 36% cap on interest this year. Consequently, consumer advocates offered compromise language that would allow payday lenders to roll-over these loans three times at those predatory rates before the lender would be required to offer an installment loan at reasonable rates. Even this compromise was recently defeated in the Senate Commerce Committee.
The payday lenders claim that legislation like this would kill the industry. While it would end their predatory payday loans, it would not kill off the ability of responsible lenders to make short-term loans. Minnesota is far from a leader in protecting low-income workers. Fifteen states already have either an outright ban on payday loans or they have interest rates capped at 36% or less.
The public considers loans with 300 or 400% interest rates to be corrupt. In states where there have been referenda on payday lending, voters have consistently banned these predatory loans. But here in Minnesota, the industry spends tens of thousands of dollars on high-priced lobbyists to block this consumer protection. This will never change unless the public expresses its outrage to legislators.
In these times of economic hardship, when the state budget is unable to meet the needs of low-income working people, it is more important than ever that we stop predatory lenders from lining their own pockets by trapping people in spiraling debt.