Thursday, September 6, 2007

102. Payday lending

Payday lending has been termed a monster, an addiction and a black hole. Among a number of personal testaments, "Gail" from Columbus claims that it was indeed, "like a monster," and "it consumed me." Her $300 loan took her two years and $2100 to completely pay off- after she fell victim to what often becomes an endless cycle of borrowing and repaying small short term "payday" loans at outlandish interest rates.

Others have deemed it legalized loan sharking. And when it comes to making a dollar and exploiting the poor, there are few legal loopholes left unexplored. Unfortunately, payday lenders are exempt from the Ohio Small Loan Act, which caps interest rates at 28 percent. However, with annual interest rates that approach 400 percent, the endeavor appears to be more like thievery, and a lack of morality, than anything else.

378,000 Ohio borrowers have paid more than 209 million dollars in fees, and the average borrower has between eight and thirteen loans per year. Consumers fall into a destructive cycle from which it is difficult to emerge. One commentator, in response to the argument that payday lenders help people meet short term financial needs, felt the type of help they offered was equivalent to throwing a concrete brick to someone who is drowning. It is not difficult to understand that someone who cannot afford $500 this week will have difficulty affording $575 next week (the typical interest rate consists of charging $15 for every $100 borrowed). Consumers will often pay off that loan by borrowing money from a different payday lender.

The debt trap consists of both the continuous cycle of borrowing, and often ends up in a situation in which borrowers owe numerous lending stores at one time. Critics fail to recognize that when someone needs money- money to pay their rent, purchase their prescriptions or, perhaps, put food on the table- that they will inevitably do whatever it takes. Such desperation includes stealing, selling drugs and agreeing to unreasonable loans. These decisions often become disastrous leading to further financial difficulties, or worse.

Hardly anyone has not noticed the influx of check cashing and pay day loan establishments upon our towns and cities. They have invaded 86 of Ohio's 88 counties. To put the number of payday lenders in perspective, there are more pay day lending stores in Ohio than all of the McDonalds', Burger Kings and Wendys' combined.

I have friends who I bet would argue that if people are not responsible enough to make better financial decisions, then they get what they deserve. And, of course, I am not naive enough not to realize that some people are making horrible financial decisions for lifestyle or addiction- taking a pay day loan to buy a new television, go a short trip or even to purchase drugs. In these cases, there is less sympathy, although education or treatment might be a more pertinent remedy. Either way, at nearly 400 percent interest, there is an unreasonable amount of detriment inflicted on others.

There is hope, as legislators are considering putting a 36 percent interest cap on small loans. Even better, eleven states have made them illegal to operate altogether. Reformers (In a Policy Matters Report, "Trapped in Debt") have proposed the following recommendations:

  • Immediate protection from abusive tactics and practices
  • Reasonable and Transparent Costs
  • Legal Protection for Consumers
  • Time to provided and set up financial products at bank branches and credit unions, such as:
  • Check Cashing service at a very low interest
  • Assistance in opening checking accounts
  • Free financial literacy classes
  • Offering small loans that can be paid over time

The Ohio Coalition for Responsible Lending has led a campaign to end abusive lending, support reforms that provide reasonable costs, ensure fair and just lending practices for all Ohioans and, perhaps most importantly, encourage lawmakers to reconsider the exception of payday lenders in the Ohio Small Loan Act. People should contact their local and state legislatures to encourage reform. In addition, the Ohio Coalition for Responsible Lending has a hotline where people can call if they need help managing a repayment plan or if they want to share their experience with payday lenders.

There must come a time when our society stands up to those that abuse the poor for personal financial gain. And, in addition to legislation that makes it more difficult for those that take advantage of others, we need to encourage financial literacy. Predatory lending is a significant social ill, whether it is high interest credit cards, payday lending, or dangerous mortgage loans that have led to the housing crisis in Northeast Ohio. It is through both legislation and education that the protection that consumers need and deserve will be realized.

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