In hard times, are payday loans a necessary evil?

Jun 29, 2008

For the last week, this paper has explored the impact of payday loans on working Alabamians. You've learned that Alabama law allows payday lenders to charge fees equivalent to an annual percentage rate of 456 percent for small short-term loans. You've learned how Alabama consumers, struggling with rising prices and flat earnings, turn to these legal loan sharks and find themselves trapped in debt for months or years. In hard times like these, are payday loans just a necessary evil?

Clearly, as the payday industry argues, conventional lenders are not filling the need for small, short-term loans. Until these products become available at reasonable rates, minimally regulated "fringe financing" will thrive. Anniston's moratorium on business licenses for payday loan stores is one approach to protecting consumers from this mushrooming industry. Arise members in Lee County have been working for the past year to convince financial institutions in that community to develop low-cost, short-term loan products. They are now developing educational material to let consumers in their area know that there are other, more affordable options than payday loans.

Community responses are encouraging, but substantive change will require action at another level — the Legislature. In each of the past two regular legislative sessions, bills have been introduced that would purportedly "reform" the industry. The bills proposed allowing consumers to cancel payday loans by returning the loan amount by the close of the next business day, to request an extended payment plan, to receive a rebate for early payment in full, and to prohibit payday loans to members of the military service or their families. Interestingly, they made no change to the allowable interest rate of 456 percent.

While some of these changes sound good on the surface, a little research quickly indicates that the payday loan industry itself has been pushing these same proposals across the country, hoping to end further efforts at regulation. According to North Carolina's Center for Responsible Lending, they do nothing to keep consumers from becoming trapped in a cycle of debt to payday lenders. A consumer desperate enough to pay an exorbitant interest rate for a short-term loan is unlikely to see an overnight shift in circumstances that would allow him or her to rescind the loan the following day. An extended repayment plan that costs more to use than taking out a subsequent payday loan is unlikely to appeal to low-income workers struggling to make ends meet. The same is true for rebates for early payment — they're good for those consumers who comply, but simple hard-luck arithmetic shows that few would be able to get ahead that quickly. And the prohibition of payday loans to military members and their families? Congress has already taken steps in this direction, capping interest rates on loans to service members at 36 percent and citing the never-ending debt cycle affecting many young military families as a threat to national security.

Source : http://www.annistonstar.com/