Wheel Column: Attack of Payday Predators (11/16)

You’ve probably seen signs for payday loan stores while driving through certain commercial districts back home. You’ve almost certainly seen or heard commercials telling us that when you are short on cash, these payday loan companies are there “to help you out.”

The concept behind these businesses is simple enough: They offer short-term loans to customers with the expectation of being paid back when that customer’s next paycheck comes in. What’s wrong with that? When you start to examine the industry, the answer is a lot.

Payday loan peddlers prey on the most vulnerable members of society — people who simply cannot afford these loans. They give people money with the expectation that the recipient will fall into debt. Then they charge them triple-digit interest rates for falling behind. There’s no ethical defense for this practice. The United States government needs to enact stringent limitations on the interest that payday lenders can charge.

To obtain a payday loan, borrowers often write checks for the lender to hold as collateral until the date of the loan’s maturity. If the borrower comes in and pays back the loan, they get the check back. If they default, the check is cashed by the lender, which for cash-strapped borrowers often leads to additional fees from the bank for bouncing a check.

Unfortunately, while these loans are intended to be short term, many people fall behind on their payments and end up with loans that can take years to be paid off. The interest payments then add up to be more than the original amount of the loan. Furthermore, these payday loan sharks rely on getting people in cycles of debt, where they have to take out additional payday loans to cover interest payments on earlier loans.

According to the Center for Responsible Lending, payday loans can charge interest rates between 390 and 780 percent annually. Compare that to the typical credit card interest rate, which tops off at around 20 percent.

The typical user of payday lenders takes an average of 22 payday loans out each year, illustrating the cycle of debt. Payday lenders collect $6 billion in finance charges each year, money being taken out of the pockets of America’s poor.

Take for example Janet Gosnell, who according to The Cincinnati Enquirer defaulted on a $500 payday loan she took out a few years ago. She now owes $670.75 on the loan in interest and fees and cannot even afford to make the monthly minimum payments of $81.25. She will continue to fall deeper and deeper into debt as her payday lender preys on her.

The payday lenders argue that their loans are subject to higher default rates than bank loans, so they have to charge higher interest rates. In principle that’s true, but there’s a difference between charging slightly higher interest rates for their risk and scheming to keep poor Americans in a spiraling cycle of debt.

Georgia is one of 13 states that have banned payday lending and this is a step in the right direction. Other states, or even Congress, need to take steps to limit the interest payday lenders can charge, or just outlaw such operations all together. The government has the responsibility to contribute to the welfare of its citizens. They cannot allow payday lenders to prey upon vulnerable Americans.