Payday Loans Blog

Recently, USA Today printed an article about how banks, not payday loan companies, are causing financial woes for their consumers. Banks continue to be considered the “stable financial standard”, while payday loans are the “evil” alternative. However, how much goes overlooked when it comes to bank fees and overdrafts?

The article cited two specific consumer experiences.  First, a 43 year old divorced mother of two was slapped with a $175 overdraft fees for small-dollar debit card purchases.  Small, as in coffee and lunch.  Similarly, a 33 year old had overdraft fees adding up to $400 within a few months.  She apparently kept very good tabs through her online account, but was still surprised with overdraft fees.  She stated that the fees "affected her (abilitiy to pay) groceries, gas money, everything you need to live on."

In a survey conducted by USA Today, it was found that, of the largest retail banks, none of them provide warnings for point of sale overdrafts to their consumers.  So, essentially, in the most crucial time for a consumer to know what fees will be incurred, there is no information given.  Individuals are unknowingly hit with relatively large fees.  

One of the beautiful things about payday loans is that the consumer knows beforehand exactly what fees will be added.  A lot of payday loan critics state that the short-term loans "target" unexpecting and incapable borrowers.  It seems that, at the very least, the payday loan industry provides the information necessary for it's borrowers to make informed decisions and knowledge concerning what exactly they will be paying.       

Missouri is the most recent state to bring a bill to the House looking to tighten payday loan restrictions.  The state currently caps payday loans at $500 and an individual must take out a loan for a 14-30 day period, and can renew the loan up to six times.  The new bill, filed by Rep. Mary Still, would cap the APR at 36 percent.  It would also allow a one time fee of $15 per $100 loan, but ban any renewals. 

Those in favor of the bill use the typical excuse, saying the bill will protect people from "predatory lending".  Larry Weber, Missouri Catholic Conference Executive Director, said, "People are taking out loans who, there's just not any reasonable likelihood that they're going to be able to pay this in a reasonable amount of time."  It doesn't sound like those people are being preyed upon, it sounds like they are taking out loans they can't pay back.  

Responsible lending is up to the lender.  Responsible borrowing is up to the borrower.  A payday loan is a short-term loan for those who can't get a loan from a more traditional financial lender.  Payday loan companies have higher rates because they take on a greater risk.  

Capping these short-term rates would initially cripple payday loan companies, and ultimately push them out of business.  Luckily, the Missouri House has faced similar bills in the past that have gotten nowhere.  Hopefully, the House will recognize the need for payday loan companies and how they provide a needed service to a lot of people.  

A bill that capped the annual percentage rate on short-term payday loans at 28 percent was signed by Ohio Governor Ted Strickland earlier this past year.  However, Rep. Bob Hagan stated recently that he is "embarrassed that the storefronts continue to operate throughout Ohio."

Hagan sponsored a bill last year that would have put a 36 percent cap on payday loan rates.  As stated above, a different bill was passed that makes the cap even lower.  Apparently, Ohio payday loan companies have now obtained licenses under two other code setions-the Small Loan Act and the Mortgage Loan Act.  Hagan said, "They (the payday loan companies) seem to have won on legal terms."  It seems interesting that he is trying to condemn the industry for legally keeping higher rates.

He later went on to say, "It's embarrassing, it's wrong and the people of the state of Ohio have said as loud as they could that they didn't want this type of payday lending industry to operate in the state of Ohio."  That statement seems a bit contradictory on several levels. 

First of all, if the citizens have "said as loud as they could" that they don't want payday loan companies, then how are the companies staying in business?  Could it be that the Ohio citizens are still using that resource?  A lot of individuals responsibly use the payday loan service with no negative experiences or problems. 

The second thing Hagan indicated in this statement is that he doesn't seem to want to just cap the rates, he wants the whole industry to leave the state.  Apparently he realizes that a 28 percent rate cap would ultimately put the industry out of business. 

Putting payday loan companies out of business would not solve borrower's problems of needing a loan.  They would have to get a loan from a different source, and some may not be able to reach the higher qualifications of a bank loan.  Payday loans help consumers who need a quick and convenient loan.  Taking that service away would only cause more hardships for Ohio citizens that need a short-term loan option.

One of the major issues that opponents to the payday loan industry has is the rate percentage.  Short-term loans do require a higher rate of interest.  However, the effect on consumers due to the rates is often taken out of context and exaggerated.  Payday loan advocates have often pointed out that the fees attached to "traditional" borrowing, such as credit cards, are often higher than payday loans.

USA Today recently reported an increase in bank credit card fees.  It reported that, "A growing number of banks are raising credit card fees or rolling out new fees..."  Some of the specific banks cited were Wells Fargo, which increased late fees and cash-advances fees; Chase, putting a yearly $120 fee on cards with low interest rates; and American Express, which raised its late fee for some business cards.

Robert Hammer, chairman of R.K. Hammer, stated that banks "are not going to watch their costs go up and take no action."  So, in essence, banks are deciding to increase rates and fees to protect itself against the failing economy.  I wonder if the "consumer advocates" will be fighting against this action as hard as they fight against short-term payday loans.

Managing director of Fitch Ratings, Kevin Duignan, recently stated that, "The unemployment outlook is dreary, there's been a tremendous loss of personal wealth, and the housing situation has forced many consumers to take a hit."  So, in response to the "huge hit" that consumers have been taking, banks will raise rates and fees.

It's interesting to note that many payday loan consumers recognize that the fees they are charged by banks are already much greater than those needed to take out a payday loan.  That is exactly why payday loans are such a great benefit to those who need short-term loans in a hurry.  They know exactly what the fee will be and don't have to worry about any hidden fees or charges.   

Washington states House of Representatives passed a payday loan law that has been called "a balance for borrowers and lenders."

State Representative Steve Kriby said the Bill "has been carefully assembled from parts of several bills we've discussed" in a House Financial Institutions and Insurance Committee.  The "several bills" is actually nine different payday loan measures.  The Committee heard testimony on the nine measures and Kirby stated, "The legislations we passed in the House early this morning uses the best parts of those bills to craft what I believe is on eof the best payday laws in the nation."

There are several aspects of the new legislation that is set up to help both the consumers and the industry.  Some of these aspects include: payday loans being limited to no more than 30 percent of a borrower's income or $700; customer right to an installment plan if they cannot pay off the loan outright-with three months to repay loans of up to $400, and six months to repay loans of more than $400; customers who are on an installment plan or in default on a loan could not receive a new loan; and implementation of an electronic system to ensure that these restrictions are being obeyed by lenders and borrowers.

The legislation is meant to be a compromise to provide security for consumers, but allow the payday loan industry to continue to provide services.  Kirby said, "Our goal in the legislation is to preserve payday loans as an option for people who have no other choice.  This bill helps consumers tay out of trouble if they need to use the product, and it makes it easier for them to escape trouble if they inadvertently fall into a cycle of revolving debt."

Later he points out that payday loans are sometimes the only choice for certain individuals.  A lot of people don't have the option to just reach into their wallet and use a credit card to take care of short-term issues.  Payday loans provide a service that banks and credit unions do not.  By creating legislation that satisfies lawmakers but enables the payday loan industry to provide a responsible borrowing option is essential.   

Initial approval was given yesterday in South Carolina's Senate for a bill that would ultimately kill the payday loans industry.  The Senate subcommitee passed a bill, with a 4-3 vote, that would limit payday loans to 25 percent of the customer's gross income.  The bill would also require a seven-day waiting period between loans.  

The limit based on the borrower's income would basically disqualify the lower income costumers from getting a payday loan, which is a short term, high interest loan.  A similar bill was passed in the Senate last year that was very similar to the recent bill.  The House later killed that bill. 

Jamie Fulmer, a spokesman for the payday lending company, Advance America, stated his feelings regarding the passing of such a bill.  He said, "I think it will make it very difficult for any operator to continue operating in South Carolina."

There have already been several legislative measures to limit or restrict how payday loan companies operate.  Now, some in the Senate want to pass legislation that would require even more regulations and make it very difficult for any payday loan company to survive. 

Concerning more stict legislation, John Ruoff, research director for South Carolina Fairshare, stated, "We think this is a real strong approach.  If you're not going to ban them, then you have to regulate them heavily."  The very obvious problem with that comment is that, by "heavily" regulating the industry, to the extent that they are trying to, the industry won't need regulation for long, because it will die. 

The only thing a bill like this will do is eliminate hundreds of jobs and taking consumer freedom away from citizens.  Payday loans are available to those who want or need them.  Taking that option away is just limiting choice.  Regulations are already in place to protect some consumer rights.  Consumer advocates should be satisfied and payday loans should continue to be an option to those who need them.  

On of the big questions with the new administration is whether there will be new legislation restricting or completely getting rid of payday loan companies. This new administration portrays itself as a protector of consumer rights, and there is more concern about legislation changing the current industry.

According to Obama's website, the President is planning on demanding more disclosure from payday loan companies and institute a 36% cap on all American loans. This site also states that he will “encourage banks, credit unions and Community Development Financial Institutions to provide affordable short-term and small-dollar loans and to drive unscrupulous lenders out of business.”

First of all, I can't understand why the President would want to force a valid industry out of business. I would assume that the main goal would be to maintain current employment and encourage greater opportunities for employment, not to get rid of thousands of American citizen jobs.

Rates are high to make a profit. If they dip lower and lower, companies-not just payday loan companies-will lose money. Let's name a couple other industries and situations that have higher APR's: credit card companies, bounced checks, negative credit reports-thus high interest car and home loans, negative checking balance fees, etc.

The difference in these is that, while these APR fees are in the hundreds, like payday loans, they are levied upon people for having financial struggles. Payday loans are accepted by people freely, with a full understanding of what the fee is beforehand.

Payday loan services are available to those people who need small, short-term loans. There are available because of need. Outlawing that financial choice is just irresponsible. Perhaps the rates will be capped, I guess we'll see. But, encouraging legislation that will drive payday loan companies out of business is ridiculous, and is ultimately taking away a useful service and legitimate jobs.