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.



1 comments posted

In defending his legislation,

In defending his legislation, HB 2191-the Payday Lending bill, Rep Chris Ross’s assertion that legalization of payday loans is somehow consumer protection would be laughable if it wasn’t such a dangerous bill. Ross says that the interest fees and limits protect consumers but even with the recent amendments HB 2191 carries significant fees that burden borrowers with an annual interest rate of 369%.


Payday lending at triple digit interest rates has long been illegal in Pennsylvania regardless of whether loans are made online or at a storefront.  In 2010 the Pennsylvania Supreme court unanimously upheld enforcement actions by the Banking Department to shut down illegal payday operation and now the Banking Department can and does go after and fine companies operating in Pennsylvania, successfully bringing in revenue to our state from unscrupulous lenders.


In its study of payday lending the United State Department of Defense noted that Pennsylvania’s existing law is superior to laws like HB 2191 in other states.  The Department of Defense specifically stated that laws like HB 2191 do not stop the debt trap. In fact these predatory payday loans caused so much harm to the finances of United State Service Members that Congress and President George Bush signed a law capping interest rates at 36% because they threatened our military readiness.  Pennsylvania went further capping it at 24% but Chris Ross wants to remove those protections from the people of Pennsylvania.


Rep Ross reports that this bill is a necessary step to protect Pennsylvanians’ however the provisions he mentions are meaningless because they do not stop the debt trap families fall into. Data from other states with regulations that are similar to HB 2191 reveal that payday borrowers are stuck in 9 transitions a year and that 60% of payday revenue are due to borrowers with 12 or more loans a year.

These predatory payday loans cause so much harm to the finances of United State Service members that Congress and President George Bush signed a law capping interest rates because they threatened our military readinessThese predatory payday loans cause so much harm to the finances of United State Service members that Congress and President George Bush signed a law capping interest rates because they threatened our military readinessThese predatory payday loans cause so much harm to the finances of United State Service members that Congress and President George Bush signed a law capping interest rates because they threatened our military readiness

Ross states that because payday loans are accessible on the Internet we should make them legal in Pennsylvania. There are many inappropriate and even illegal items and services available on the Internet; does Rep. Ross think we should legalize everything that is available on the Internet in Pennsylvania?   Or should we allow the Attorney Generals Office and the Banking Department to go after these shady businesses issuing significant fines and penalties while they protect Pennsylvanians?

Perhaps Rep. Ross should listen to the many consumer protection groups that oppose this bill- such as Community Legal Services, AARP, the PA Chapters of the Military Officers Association of America, Pennsylvania Council of Churches, the United Way of Southeastern Pennsylvania, and the Bucks County Women’s Advocacy Coalition to name a few of more than 50 other organizations who have publicly stated their opposition to this bill.


The fact that Chris Ross wants to legalize loan sharking shows he has lost touch with the values of the people of his district and the state. This is not the direction we need to move in this state if we want to grow our economy and protect our people. 

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