Just yesterday I mentioned abusive payday lending practices to a friend of mine. He stated he used the loans a few times in his early 20s because he was irritated with his bank at the time. He had accrued multiple overdraft fees through his bank account, and never received adequate notice of the fees and quickly was in over his head with debt. He closed his account and vowed never to use the institution again. I began asking all the questions concerning the foundation issues of the payday loan business model. “How much interest did you pay per loan, did you ever get stuck in the cycle of churning your loans, what made you stop using them?”
He had paid about $53.00 per loan, did not get stuck in the cycle of refinancing his loans, but only stopped using them when he earned more income. So this got me thinking, how do most payday loan customers get out of it if they aren’t able to earn more income? Are there other options out there?
Payday lenders are legal only because the state legislature granted an exemption from the state’s loansharking statute in the early 80s. Indiana has authorized payday loans for up to $550, but the amount to be paid back could not exceed 20% of the borrower’s monthly income. If a lender renews a loan more than three times they must then offer an extended payment plan at no cost. There is also a seven day “cooling off” period required after six consecutive loans. Also, borrowers can have two payday loans outstanding at a time, but only one from any individual lender. But, even these provisions have been ineffective at stopping the payday loan debt trap.
In our state, payday lenders drain $70.5 million from our residents annually. This is a major loss to our local economy. Payday lenders charge, on an average 14 day loan, 356% APR. Although payday loans are marketed as a quick financial fix, they typically result in a long-term debt trap. Often consumers are stuck with multiple loans per year, paying more fees than the total amount borrowed.
The Prosperity Now Assets & Opportunity Scorecard indicate Indiana is doing poorly in helping protect consumers from predatory lending practices. Indiana has adopted only one of the four policies that protect us. Learn more here.
What can be done?
The CFPB held a field hearing March 26, 2015 in Richmond, VA, see remarks. There was a large turnout from the payday industry employees and owners, but a lot of testimony from both sides. There will be a one month comment period for consumers to write into the CFPB about their experiences with payday loans. This is crucial. If you have a story, please comment today. The fact sheet on the CFPB rule is available here. It’s important to understand that the CFPB is not trying to eliminate the payday loan industry, but regulate the terms to protect consumers. Learn more about regulations.
The Network is currently working on understanding the regulatory environment in Indiana to see if there is capability to incorporate a Texas based employer based small dollar loan alternative to Hoosiers. Texas Community Capital is currently making efforts to expand the Community Loan Center product currently being used throughout cities in Texas. The program allows employers to participate at no cost and with direct deposit payroll. Employees of the companies can borrow up to $1,000 at 18% interest with a small fee of $20.00. The loan is paid back through monthly payroll deduction over the course of the year.
The Network believes there aren’t many options for individuals with sub-prime credit to safely and affordably borrow. We are working hard to create and expand borrowing opportunities as well as providing resources about payday lending. If you have any questions or insight, please contact the Network.