Every November, a host of new fliers appear on doors in my low-income neighborhood. They are not typical advertisements. With all the Black Friday and holiday hubbub this time of the year, it’s not unusual for consumers to be bombarded with promises of never-before-seen sales, “blowouts”, and price slashing. In my neighborhood, however, it’s not unusual to come home from work and find a door-hanger promising quick payday or title loans, guaranteed home/auto financing “regardless of credit”, and low weekly rent-to-own payments [invariably for those big-screen televisions we keep hearing the poor overwhelmingly own].
So it came as no surprise that I found just such an advertisement hanging on my front door when I arrived home one recent November afternoon. The ad proclaims “Turn your car title into cash!” and entices the reader with promises of the “most cash”, “Instant approval”, and “no credit check”. It also claims to provide the lowest rates. Normally I toss these things in the trash bin where they belong. But that bold, all-caps “lowest rates” stamp really set me off.
Many of the same companies that provide payday loans are also in the car title loan business and use the exact same short-term, high-interest loan model. Annual percentage rates (APR) for title and payday loans in Missouri typically fall between 300 and 400 percent. Thanks to skimpy regulatory laws, payday lenders in Missouri can charge up to 75 percent of the loan amount in interest and fees–or $75 for every $100 loaned. That amounts to a whopping 1,950 APR at the top end. It also makes Missouri a virtual paradise for lenders who are closing their doors in other states that have caps on payday loan interest rates.
The poor make ideal targets
If you’re hard-up for a few hundred dollars, what’s several hundred more in interest and fees, right? And if you can’t pay back nearly twice what you borrowed in a matter of days, just extend the loan; for a fee, of course. Due to high fees and short terms, many Missouri borrowers will take out a payday loan to pay off another payday loan, creating a cycle of unsustainable debt. The average number of payday loans per borrower [nationally] is 9 per year.
Who would fall into such a trap? Low-income individuals who regularly fall behind on monthly bills or want, like everyone else, to put a few gifts under the Christmas tree are likely to be lured in by easy, instant cash. If you have ever found yourself in the position of being unable to pay a bill that was due yesterday and/or are facing shut-off or eviction, you too are a target.
The Better Business Bureaus of Missouri and Illinois released a 2009 report that details predatory lending practices. In it, they cite The Consumer Federation of America’s profile of the typical borrower: “Payday loan borrowers are typically female, make around $25,000 a year, and more likely to be minorities than the general population.” The report goes on to quote a press release from U.S. Rep. Luis Gutierrez of Illinois, which states that payday lenders are “concentrated in low-income and minority neighborhoods” and that “those who most need these loans are often the least able to repay them.”
The public accountability initiative, National People’s Action, has collected data on predatory payday lenders and their enablers. In an aptly named report The Predator’s Creditors is a telling graphic “web” of lenders that puts banks like Wells Fargo, Bank of America, and US Bank at the center of the industry. Stuck in the sinister web of onerous loans is JP Morgan and executives from Goldman Sachs and Morgan Stanley, all recipients of TARP money.
At a time when credit for personal and small business loans is hard to come by, these banks are extending massive amounts of credit to payday lenders so they in turn can fleece the public—and Missourians in particular—out of billions of dollars in fees and exorbitant interest. According to The Predator’s Creditors, “Big banks provide $1.5 billion in credit to publicly held payday loan companies, and an estimated $2.5-3 billion to the industry as a whole.”
Regulatory law and order
By Missouri law, consumers can obtain short-term loans (typically 2 weeks) from various payday loan companies simultaneously. Unlike in other states, Missourians are allowed to renew loans up to six times while being charged the same interest rate as the original loan and a 5% fee on the outstanding balance. That’s a lot of cheese.
The Division of Finance reports that Missouri is the only state, of 9 contiguous states, to allow renewal of payday loans. Next to Tennessee, Missouri has the most payday loan companies. As of 2009, Tennessee had more than 1,480 and Missouri had 1,275. Not surprisingly, Missouri also allows the highest APR with 1,950%, the next highest being Arkansas with a maximum APR of 520%. Of all 50 states, multiple payday loans (more than 5 per year) cost Missourians the most—Missouri ranked #2 on the list of states, at $317 million according to the Center for Financial Responsibility.
Multiple congressional attempts to cap payday loan APR’s have failed, though a few states have been successful in ridding themselves of payday loan companies. Most recently, Arizona legislators let a law expire that allowed high-interest loans, capping them at 36% and effectively putting a stop to predatory lending practices. Washington, Ohio, North Carolina, and the District of Columbia are all among the states that let lapse temporary laws allowing payday loans and/or put caps on loan APR’s. Montana voters approved I-164 this November, a ballot initiative to cap car title and payday loan APR’s at 36%.
A similar interest cap in Missouri would undoubtedly offer Missourians protection from predatory lenders and stop a major factor in the high-debt cycle. For maximum effect, Missouri should adopt restrictions on the number of simultaneous payday loans a person/household can obtain. We simply can’t afford to adopt the easy-come, easy-go attitude of the banking industry.
Image credit: Ameriloansearch.com