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More Payday Loan Information December 5, 2006

Posted by Jay Medina in News and Information.

Here is a follow-up to my previous story about “Payday Loans”.  I hope you find this information useful. Thank you for reading and for doing something positive today.

Group Calls For Regulation of Payday Loans

Jim Fuquay Star-Telegram Staff Writer

Consumers could save billions on the cost of getting small short-term loans if legislators banned or put lower rate caps on payday loans, according to a new study that was immediately criticized by the industry.

The Center for Responsible Lending in Durham, N.C., said borrowers last year paid $4.6 billion in fees and interest for the loans, which typically are made for a couple of weeks or until the borrower’s next payday, hence the name.

The group said that most of that money, $4.2 billion, comes from people who take out five or more payday loans a year and thus represents abusive or predatory loan practices.

“Payday loans sink borrowers into quicksand-like debt,” said Michael Calhoun, president of the center. He suggested that states regulate the loans with “reasonable interest rate limits,” perhaps as high as 36 percent annually, to make short-term unsecured loans attractive to lenders but not overly expensive to consumers.

The Community Financial Services Association of America, which represents payday lenders, called the study a “rehash of flawed statistics” that ignores borrowers’ credit needs. The association said the typical $15 fee to borrow $100 from a payday lender is less than a late fee or bank overdraft charge, even though the borrowing fee translates to an annual interest rate of about 400 percent.

In September the Defense Department said it endorsed a 36 percent cap on payday loans to military personnel. Representatives of Cash America International and First Cash Financial Services, two Tarrant County companies prominent in payday lending, said they could not make money at that rate and would not do business with service personnel if such a cap became law.

Cash America and First Cash executives were not available to comment on the new report.

In Texas, consumer and commercial loans are capped by the state’s constitution at 10 percent, although numerous exceptions are allowed. Payday lenders in the state generally impose a service fee as a way to avoid the ceiling.

Payday lending emerged in the 1990s. Today there are more than 24,000 payday loan locations in the country that lent a total of $28.2 billion last year, according to the new report.

Calhoun said one of the worst aspects of payday lending is that consumers frequently must roll over a loan upon its due date, incurring another round of fees and interest. His group estimated that about 60 percent of borrowers get 12 or more payday loans annually, while the average borrower takes out nine payday loans a year.

At an average loan value of $325 and an average loan fee of $52, that borrower pays $468 for those nine loans during the year, the study said.

Steven Schlein, a spokesman for the payday lenders’ association, said his group supports state regulation of service fees, the number of allowable rollovers and loan amounts.

Such measures passed recently in Illinois and Michigan with his group’s support, he said.

Big business

Here are total consumer payments on payday loans in the top 10 states. Dollar amounts are in millions.








































S. Carolina











SOURCE: Center for Responsible Lending



1. Lynz - December 22, 2006

The Star-Telegram article on payday loans lacked any perspective on “costs” to consumers.

The article noted that consumers annually pay $4.2 billion in payday lending fees, but forgot to mention that consumers receive $40 billion in credit for those fees. According to the Center for Responsible Lending (CRL), payday loans should be banned because they cost consumers money. Consumers also spend $42 billion a year on books even though books are available free at the local library. So, why not ban the sale of books?

Let’s put it in perspective. In 2006, consumers will also spend $4.2 billion in ATM service charges to withdraw their own money. They will pay an estimated $22 billion in NSF fees to banks and credit unions and banks will collect an estimated $10.3 billion for overdraft protection services. Businesses will charge an estimated $57 billion in late bill payment fees (more than 140 percent of the total estimated payday lending volume in the U.S.). And credit card interest will cost consumers more than $87 billion.

We have worked with policymakers in 38 states to support responsible regulation that protects consumers and their access to credit. In a state-regulated environment, payday advances can often be the best choice for consumers. Elimination of regulated storefront payday lending will only drive consumers to unregulated offshore Internet lenders or force them to choose between more expensive alternatives such as bounced check, overdraft protection or late bill payment fees.

Unlike CRL, who is opposed to virtually every consumer choice when it comes to short-term credit, we believe consumers are very capable of making decisions without self-appointed guardians, like CRL, telling them what financial products they can, and cannot, use. The bottom line is that consumers spend $4.2 billion a year for a product they choose over the alternatives.

Darrin Andersen
Community Financial Services Association
515 King Street, #300
Alexandria, VA 22314

2. Jay Medina - December 22, 2006

Thank you for your comment, Lynz or Darrin. I think the point here is that payday loans incur a high rate of interest, making it nearly impossible to pay off the loan, and putting consumers in jeopardy of damaging their credit.

It is fair to assume that when one utilizes a service, a fee should be charged. In a free-market society, that is the way it works. However, when rates and fees are high enough to create an endless cycle of debt that the consumer has a hard time eliminating, then there is a problem. It is an ongoing conundrum very much the same way credit card debt does the same thing to consumers. However, there can be no denying that a ripple effect occurs in the economy when wave after wave of consumer is hit by high debt. Nither bankruptcies or less spending in the economy are good things.

Therefore, your free library book example is a bit flawed in the sense that neither buying books that you own after the transaction, nor borrowing books from the library incur such high fees that it would be impossible for the the user of such services to ever see the light of day.

My job is not to take sides, but to merely inform. We should all take responsibility for our individual decisions and actions. And as I can only make a guess here, that although the payday service industry is a valuable one to consumers as a concept, the fees and rates associated with taking out such a loan combined with the lack of self-policing in the industry may have required efforts to be undertaken to better protect consumers; and in the end, the payday loan industry as well.

Consumers should also be informed before making such decisions. In that sense, the article being commented on would merely do just that… make for better educated consumers. After all, they (we) should be responsible for the decisions they (we) make as well. Therefore decisions should be made with appropriate disclosure of the services and fees associated prior to executing the transaction. Wouldn’t you agree?

If your group is working with states and policy-makers to create a better product and service, then I support you and applaud you for doing so.

Once again, thank you for your comments to this board.

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