What would you do if your car hit a pothole and needed two new tires?
Many of us would turn to credit or debit cards.
But what happens when those come due? Could you pay that $250 to $400 from savings? If not, how will you handle the interest charges — which average 17% nationwide — or late fees ranging from $25 to $35?
According to Bankrate.com, 28% of U.S. adults have no emergency savings. Another 25% have a “rainy day” fund that won’t cover three months’ of living expenses. So many Americans turn to payday loans. Nearly 12 million use these each year, according to the Federal Reserve Bank in St. Louis.
A payday loan is a short term loan for amounts usually under $500. The loan is to be repaid in two weeks. Interest is also paid for those weeks — usually about 15%. So if you borrow $500 that equals $75 interest.
What if you can’t pay in two weeks? The loan rolls over — for another $75 — plus a late fee. And, since the late fee is on a check you wrote, that may be sent as “non-sufficient funds” to your bank. That means another charge.
Bobbie Lison, financial counselor at Catholic Charities, told The Compass “people don’t have just one payday loan, they have eight. They had the one and they needed to pay it back, and weren’t able to so they went to the next place, but didn’t get enough to pay it back, so they went to another.”
The result? If you can’t repay on time, you could end up paying an annual percentage rate 20 times greater than the average credit card. In Wisconsin, the payday loan rate is capped at 574%. That means, if you can’t repay that $500, you end up paying nearly $3,000, plus your original loan, in a year.
This is usury. Webster’s defines usury as “the lending of money at exorbitant interest rates.”
In October of 2017, the Consumer Financial Protection Bureau (CFPB) passed the “Small Dollar Lending Rule” meant to protect U.S. borrowers from such practices in the payday loan arena. However, the rule was challenged and, last February, the CFPB decided to modify the rule.
Many groups, including Catholic Charities USA and the U.S. Catholic Bishops protested. Writing to the CFPB, they said “we are concerned that the rule as finalized puts forward an exception from the borrower’s ability to repay standard which allows for six 300% interest payday loans in a year. This sanctioning of usurious loans not only contradicts our own faith traditions, but also contradicts the CFPB’s own reasoning laid out in its rule.”
The CFPB has delayed the modification until November.
In the meantime, in Wisconsin, state Sen. André Jacque (R-De Pere) and fellow Senators Lena Taylor (D-Milwaukee) and Steve Nass (R-Whitewater) plan to introduce a “Protection from Predatory Lending Proposal” in the state Legislature to limit annual interest rates on payday loans to 36%. This would parallel the 2006 federal Military Lending Act that capped loans to active duty personnel and their families at 36%.
“(Payday loans) trap thousands of Wisconsin residents each year in an endless cycle of debt through their predatory lending practices,” Sen. Jacque told fellow legislators.
Both the CFPB’s original protections and any proposed state legislation to curb predatory interest rates should be supported. As the U.S. bishops have said about payday loans: “In most instances, however, payday loans are made in a way that makes it almost impossible for borrowers to repay in the required time frame, requiring them to take on more debt. The typical borrower is in payday loan debt for 199 days out of the year. She conducts 10 transactions per year, most of these are ‘rolling over’ another loan. Most borrowers take out payday loans to pay for basic needs, not for unexpected emergencies or to splurge. The vast majority of payday loans are taken out by people in or near poverty.”
No business should take advantage of the poor. If 17% interest is enough for credit card companies to make a profit, then 36% should cover the added risk of default taken on by payday lenders and still leave them with a reasonable profit.