The restriction of payday loans in Washington is gaining some traction in the State Legislature this year. There are at least nine bills in the House and others in the Senate. Some are not that bad, only restricting loans to 30% of a borrowers income, and others are awful, restricting APR on loans to 12%.
Rep. Sherry Appleton (D-Poulsbo) introduced the harshest bill. Her bill would cap APR on payday loans at 12%. In her words, “It’s time to do something, we can’t wait. The economic times are bad.” So the solution is to make them worse?
MoneyTree, a payday lender, employs 850 people in the state of Washington. Putting them all out of work to protect morons from borrowing irresponsibly is going to help the economic times? Economic prosperity only happens when the government allows us to succeed and to fail.
The Olympian anecdotally refers to Jeanne Henderson. She and her daughter became homeless and turned to payday loans to help cover clothes, food and shelter. It started as a $300 loan. Then it became simultaneous loans from two different lenders that ballooned into over $2,000 she owed back.
Again, is the problem here the payday loan? Or could it perhaps be the sheer ignorance of borrowing money when you are homeless that you have no way of paying back? For every Jeanne Henderson there are 99 responsible borrowers who payback that $300 loan,plus the $45 in fees,on time.
Let’s see what happens with a 12% APR cap. That translates to 1% per month. So for a two week loan, you’re looking at 0.5% in interest. Simply put, if you borrowed $100 for two weeks, you would only have to pay back $100.50. That’s a whopping fifty cents in fees.
How can anyone make a living offering such loans? Let’s look more closely at how interest and term work together.
Suppose you want to buy a house. The bank agrees to fund your loan for 30 years at 6% interest. This is very common for a home mortgage. Now, at 6% per year, times thirty years, that’s 180% paid in interest.
So if you buy a $200,000 house, you have to pay back $560,000. That’s because 180% of 200,000 is 360,000. So add the interest plus the principal and you’ve got how much you pay back. Granted, these are broken up into monthly payments which would be about $1,500.
Now let us examine a payday loan. Suppose you need $200. The payday lender agrees to give you the money for 14 days at 365% APR. Simple math tells us that 365% over one year translates to 1% per day. So over the 14 day term, you pay 1% per day in interest. That means after 14 days, you pay back $228, or 14% of the loan in interest.
Ok, this is a complicated math question, but which is greater, 180% or 14%? So you see, the APR means absolutely nothing when not put into the context of the term. You should be more interested in how much you pay in interest at the end of the term of the loan.
Sherry Appleton and other legislators ignorantly criticize payday loans and use uneducated borrowers like Jeanne Henderson to prove their point. They ignore the mountains of evidence that show payday loans aren’t driving people into bankruptcy. Hopefully other legislators don’t get caught up in this fanatical lynch mob out to ban payday loans.
