You see them on the outskirts of military bases and at strip malls across Washington: quick-money loan shops with names like Money Tree, Payday Plus Loans, Money Depot, Advance America, Fast Cash Loans, Payday Plus and the Cash Store. Short-term, high-interest loans - so-called payday loans - have grown to be a billion-dollar-a-year industry in the decade since Washington legalized them. Nearly 3 million payday loans were made in Washington in 2004, the most recent year for which data is available.But critics including financial counselors, advocates for the poor, even one U.S. naval commander say that payday loans are more like predatory lending, aimed at locking borrowers into an endless cycle of debt. One out of three payday loans borrowers, according to state regulators, takes out at least 10 such loans a year. Lawmakers are considering several proposals to restrict payday lending, including dramatically cutting the interest rate and shrinking the maximum loan. The goal is to make the loans available without letting people get trapped by debt.
Companies, offering payday loans, say the proposals would put them out of business, leaving people prey to loan sharks and illegal Internet lenders. With payday loans, a person writes the company a post-dated check, made out for, say, $575, and gets handed $500. The customer can reclaim that check by paying back the loan and fees. If not, the lender simply keeps and cashes the check. In Washington, maximum loan fees are $15 per $100 for loans up to $500. The fees on a maximum loan ($700) can be up to $95. The loans last for up to 45 days.
One of the chief complaints on payday loans is that those fees add up to an extremely high interest rate, particularly considering that many people only need the money for a couple of weeks or less. The $45 fee on a $300 payday loan for two weeks is the equivalent of an annual interest rate of 391%. People who get these loans really don't have the ability to pay them back. They needed the tennis shoes or the food or the rent payment. They knew it was a lousy loan, but they were desperate.
Lenders Say Practice Is Fair
The industry says that it's being unfairly pilloried by little more than anecdotes and myths. They say the terms of the payday loans are clearly disclosed and, under state law, a loan can be rescinded within the first 24 hours at no cost. It's preposterous to suggest - as critics do - that the industry targets particular segments of society. Ten years ago, it was illegal in Washington for a lender other than a bank or credit card company to charge more than 12% annual interest. But small lenders found loopholes to circumvent the rules. Some would take a post-dated check, give back some money and pay the rest in largely worthless trading stamps, purportedly for gifts in a catalog.
So lawmakers legalized and regulated the payday loans industry in 1995. Two years ago, they changed the laws to give borrowers some additional protections, such as being able to rescind a loan free of charge within the first 24 hours. In exchange, the maximum loan was raised from $500 to $700.
State Fields Some Complaints
In recent years, state regulators have slapped few payday loans businesses. The companies have been largely compliant. The proposals lawmakers are considering would cut the maximum loan from $700 to $500. One would restrict interest to 10% or a maximum of $25. Another would cap interest at 3% a month, or 36% a year, but just 3% a month. The bills would cut payday lenders' revenue by 30% to 80%.
Experts say these bills are tantamount to prohibition. Washington's $15 per $100 rate is at the lower end of the spectrum among the 36 states that allow payday loans. At the hearing, lawmakers seemed to have mixed feelings about clamping down on payday lenders. Several agreed that the best solution is probably better financial education in school. Others worried about where people desperate for cash would go. Experts believe that the root of the problem is people spending more money than they make. Regulating or doing away with an industry, does that really solve the problem of overspending?
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