Fresno Newspaper Weighs in on Payday Advances
By Paul RizzoPayday Loan Writer
Predatory payday loans are an exploitative scam, known in the past as “usury.” So begins an editorial in The Fresno Bee.
Congress in October passed a 36% cap on interest on payday loans for military personnel (it takes effect Oct. 1, 2007). That still is an unconscionably high interest rate, but it’s a lot better than the current 300% to 700% range of the typical payday loan.
The new Congress should extend that 36% cap on faxless payday loans for all consumers.
The instant payday loan industry calls these products “emergency two-week loans,” but the Center for Responsible Lending, has a better name: “financial quicksand.” The center’s recent report said the average payday borrower pays $793 for a $325 loan.
How does that happen?
Take a typical new military recruit. He gets a two-week paycheck of $600. When the family car breaks down and needs repair, he takes out a two-week payday loan for $325, paying a fee of $52.
If his expenses for food, utilities, health care and other essentials are $500, that leaves him only $100 – not enough to repay the loan in full, as required after two weeks when his next paycheck arrives. So he takes out a new loan to pay off the old quick cash loan.
After flipping the original loan 8 times, he’s now up to $468 in interest. To pay back principal and interest, he has to come up with $793.
These are not emergency two-week cash advances, but long-term loans at exorbitant rates of interest.
That’s why Chairwoman Sheila Bair of the Federal Deposit Insurance Corp. says that the lending market has become divided between two groups, those who get “virtually cost-free basic financial services” and those who “pay high amounts.” Lower-income people who have no financial cushion pay exorbitant fees and interest on loans, while those of higher income pay very little.
The payday advance industry worries that the cap passed by Congress for the military could serve as a precedent. They ought to worry. These exorbitant-rate loans are unconscionable for all consumers. A 36% cap should apply to all.
