It will soon be hard – some predict impossible – to get a payday loan in Ohio.
Next week, Governor Ted Strickland is expected to sign legislation that caps the allowable interest on a payday loan at 28 percent. Right now in Ohio, the going interest rate for these short-term loans is 391 percent. The new law also limits a payday loan to $500 and requires the loan to be at least 31 days instead of two weeks.
The Community Financial Services Association, which represents a majority of the payday loan companies in the country, says the rate cap will force the 1,600 stores in Ohio to close. “They would lose money on every loan,” says CFSA spokesperson Lyndsey Medsker.
Medsker criticizes lawmakers in Ohio for not listening to their constituents when they passed this bill. “People like the service; they appreciate the service,” she says.
Not everyone. Gail Meyers of Columbus, who calls herself “a victim of payday lending,” told lawmakers what happened when she borrowed $300. Two weeks later, after paying back the loan plus $45 interest, she took out another payday loan to pay her bills.
“Before I knew it, what I thought was a ‘short term solution’ became a two-year financial nightmare,” she testified.
Because she could not repay the loan after two weeks, Meyers continued to get loan after loan for two years. Her $300 payday loan ended up costing her $2,640. In her testimony, Meyers called payday lenders “legalized loan sharks who need to be regulated.”
Bill Faith won’t shed a tear when payday lenders pull out of the state. “Our view is good riddance,” says Faith, executive director of the Coalition on Homelessness and Housing in Ohio. “I think for most consumers who use payday loans, the absence of payday loans will save them a lot of heartache and money in the long run.”
Fact vs. fiction
The Community Services Financial Association says typical customers use a payday advance (they don’t call them loans) to cover small, unexpected expenses between paychecks. Given the options of bounced check fees or late payment penalties, the association says, it’s a smart choice.
But is it? “The industry’s model is to trap people in a cycle of debt,” Faith says. “That’s where their profitability is. That is where the bulk of their loans are made; to people who are getting loan after loan after loan.”
According to a December 2007 report from the Center for Responsible Lending, the vast majority of families taking out payday loans are ensnared in long-term debt, “making them worse off than they would be without high-cost payday lending.” The study found that more than 60 percent of payday loans go to borrowers with 12 or more transactions a year.
Payday loans are marketed as two-week loans, but the report concludes they only work as a one-time quick cash solution about two percent of the time.
“They prey on the most desperate working people in our society and I think that’s wrong,” says Nick DiGardo with the Legal Aid Society. He believes a short-term lender should be able to develop a product where they make a profit with a 28 percent interest rate.
“They can’t make the kinds of wildly unfair profit they’ve been making,” DiGardo says. “But they should be able to make a fair profit based on that amount.”
Losing their luster
The new law in Ohio is “a huge deal,” says Jean Ann Fox, director of financial services at the Consumer Federation of America. “The tide has turned on legalizing these high-cost small loans.” Michigan was the last state to allow pay day lending and that was back in 2005.
Last year, Congress capped the annual interest rate for payday loans to military families at 36 percent. And more than a dozen states have taken steps to reign in payday lenders.
- Georgia has the toughest statute on the books. It makes payday lending a violation of anti-racketeering laws.
- Payday loans are no longer permitted in North Carolina or the District of Columbia.
- In Oregon, payday loans are capped at 36 percent, plus an initial fee of $10.
- In New Hampshire, payday loans will be capped at 36 percent beginning in January of 2009.
- Payday lenders pulled out of Arkansas, after the state attorney general told them he would enforce the constitutional cap on interest at 17 percent.
My two cents
Payday lenders like to point out that in Ohio they only charge $15 per $100 borrowed. They say it’s not fair to extrapolate this out to an annual percentage rate (APR). It may not be fair, but it’s federal law. The APR is the only way a lender is allowed to state the price of a loan.
Just for fun, let’s do the numbers the way payday lenders like to do it. The average payday loan is about $300. So the interest charge on that two week loan is $45. If you flip that loan 12 times (which is not unusual) you’d pay $585 in interest to use that $300 for 26 weeks. Is that a bargain or what?
Pay day loans might be an option for some people who have an unexpected cash flow problem. But in most cases, these short-term loans become long-term debt that is paid back at a staggering interest rate.