Challenging the Conventional Wisdom on Payday Loans

A few months ago, I ran into a neighbor from my old neighborhood in Pittsburgh, East Liberty, a largely black, low-income neighborhood. She was telling me about taking out a payday loan to help cover some of her bills.

According to a new report from the Pew Center on the States, many of the people who turn to payday loans are a lot like my neighbor — just trying to make rent, buy food or keep the lights on. 

NBC News sums up the Pew Center’s key findings:

Many people think of payday loans as a way to cover an unexpected emergency – such as a car repair or medical expense  until your next paycheck comes in.

But nearly seven in 10 people who use the short-term, high-fee loans rely on them for recurring, everyday expenses such as rent, food, utilities or car payments, according to a report published Wednesday.

And instead of using them for one quick fix, many are either seeking extensions or borrowing similar amounts again and again. That’s putting many people in debt to payday lenders for months at a time, at very high cost.

Unlike many other states, Pennsylvania has strong consumer protection laws on the books to protect borrowers from predatory payday lenders. That all could change with legislation that passed the state House and is now before the Senate.

That bill would raise the annual interest rate a payday lender can charge from the current cap of 24% to 369%. It would open the door in Pennsylvania to a form of predatory lending that, as the Pew Center report found, traps many borrowers in a long-term cycle of debt. 

The Pew report offers a nice snapshot of the people who are taking on payday loans across the nation. Over the past five years, 5.5% of American adults have taken out payday loans  12 million in 2010 alone.

Fees and other charges are steep, and borrowers often take out another payday loan to pay off the last one. On average, borrowers take out eight loans of about $375 a year at an annual interest cost of $520, the Pew researchers found.

Most borrowers are white women, but that is largely a product of demographics. African-Americans, renters, and divorced women are more likely than other groups to apply for a payday loan.

Restrictions on payday lending reduce the number of people taking out loans and doesn't drive would-be borrowers to turn to online lenders, as some supporters of the Pennsylvania bill have suggested:

Of the 5.5 percent of adults nationwide who used a payday loan in the past five years, three-quarters went to storefront lenders and nearly one-quarter went online. In studying states with regulations that have eliminated storefronts, Pew found much lower payday loan usage overall; people did not borrow from online lenders instead. In these states, 2.9 percent of adults reported payday loan usage during the past five years, as opposed to more than 6 percent in states that have storefronts

This is certainly true in Pennsylvania, where the rate of payday loan usage was at 3%.

Pew researchers also asked what borrowers would do if they didn’t have access to a payday loan. Here’s what they found:

Eighty one percent of those who have used a storefront payday loan would cut back on expenses such as food and clothing. Majorities also would delay paying bills, borrow from family or friends, or sell or pawn possessions. 

I don’t know if my former neighbor is trapped in a cycle of debt or if she considered alternatives to a payday loan. But like millions of Americans, she was forced to resort to a high-interest loan just to pay the bills.

Pennsylvania lawmakers should read the Pew report closely and think twice before opening the door to thousands of predatory payday lenders in communities across the commonwealth.

 

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