In fact, the District of Columbia didn’t explicitly ban payday loans, but the city’s Payday Loan Consumer Protection Amendment Act of 2008 did cap total costs of loans in the city at 24 percent, which amounted to the same thing. Major payday lenders promptly pulled out of D.C., citing a lack of profitability. Former mayor Marion Barry, now a city councilman, initially co-sponsored the bill but ended up casting the only vote against it. “We are putting this industry out of business,” Barry warned. He was right.
At the Virginia lender, a group of women—two of whom were there to pay off loans and one of whom was picking up Chinese food next door—gossiped about the state of the industry. One woman, who kept her fur hat firmly in place while waiting, used to do her loan business downtown at a store near her office. But the interest cap ended that. “They only cash checks and do money orders there now, which doesn’t do me a bit of good,” she said.
Other than the limits on lending to members of the armed forces, there is no federal regulation specific to the industry, although that will change if President Obama gets his way. Payday loan opponents are using the ban on lending to military families the same way pro-lifers use partial-birth abortion—to make small, uncontroversial headway on a big, controversial issue. “The trend is toward the recognition that this is an abusive product,” says industry critic Day. “If it’s not good for active duty military, why is it good for anyone else?”
As federal regulation moves along, battles continue at the state level. In Ohio and Arizona last November, residents voted to impose maximum rates of 28 percent and 36 percent, respectively. Arizona’s Proposition 200 reapplied the state’s usury rate cap to payday lenders, who had previously enjoyed an exemption. In North Dakota, a similar bill was rejected by a legislative vote of 88 to 5.
What happens when a rate cap is imposed statewide? Dartmouth economist Jonathan Zinman looked at the payday lending industry in Oregon, where in 2007 an effective cap of $10 per $100 borrowed was imposed along with a minimum borrowing term of 31 days. (In neighboring Washington, by contrast, the standard is $15 per $100 and there is no minimum term.) Oregon’s Consumer and Business Services Department reported 346 licensed payday lending outlets at the end of 2006, six months before the cap kicked in. Seven months after the cap took effect, that number had fallen to 105. In September 2008 it was 82. In a December 2008 working paper, Zinman concluded that former payday customers in Oregon ended up using less desirable alternatives such as overdrafts and utility shutdowns, and that “restricting access caused deterioration in the overall financial condition of the Oregon households.” In summary, “restricting access to expensive credit harms consumers.”
A February 2008 study for the Federal Reserve Bank of New York found similar results: “Compared with households in states where payday lending is permitted, households in Georgia [after a May 2004 ban on payday lending] have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate,” wrote Federal Reserve research economists Donald P. Morgan and Michael R. Strain. In North Carolina, where payday loans were banned in December 2005, “households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check ‘protection’ sold by credit unions and banks or loans from pawnshops.”
Two weeks before I got my loan, new restrictions took effect in Virginia, including a rate cap of 36 percent. As predicted, payday lending chains are now fleeing the commonwealth. Check ’n Go stopped originating loans in Virginia and will soon close its 68 storefronts and fire its 100 employees. The State Corporation Commission counted 630 payday lending stores in April, down from 786 in December.
A Borrower Be
After I waited in line, my transaction took seven minutes and 32 seconds, a time prominently displayed on my receipt. Of course, I’d come prepared. To qualify for a loan, I had to bring a recent pay stub, a current bank statement, a utility bill from the current month, a recent phone bill, a Social Security number, and a blank check.
My $200 loan came in $20 dollar bills, with a side of paperwork. The terms of my particular loan—I was to pay $251.31 in 30 days—were spelled out very carefully in one pile, with generic information about Virginia lending laws in a second one. In large type, outlined in a gray box, was the amount of money I would have to pay the company when my loan came due. My personalized paperwork also told me that the “cost of my credit as a yearly average” was 292.63 percent.
Even with all that large print, interest rates can be confusing. “When you go into these places where people are holding two jobs and they’re desperate for money and someone says that they can roll it over for another week,” says Day, “they don’t realize they’re paying $45 on a $100 loan.” But in my line, people were very aware of the rates, grumbling about them and, in one case, asking detailed questions to figure out the cheapest way to carry some debt for an additional month.
In a bid to encourage educated decisions about borrowing, President Obama has said he would like to nudge traditional banks to get back into the small loan business. This would give borrowers an alternative to payday lenders and drive them toward institutions with more historical layers of regulation and reporting requirements. But if the recent mortgage crisis is any indication, the banks aren’t even particularly adept at helping people understand the terms of their home loans. Furthermore, they seem to be far less efficient than payday lenders, something they recognized when they got out of the business years ago. According to the most recent estimate available—a 1999 Commercial Bank National Average Report from the Federal Reserve—the cost for a small bank to originate and maintain a simple loan for one month is $174. As more of Obama’s lending restrictions come into effect, that cost is likely to increase. By comparison, Steven Schein, spokesman for the Community Financial Services Association of America, says it costs payday lenders $12 to originate a $100 loan.
But giving up the dream of poor people obtaining quick loans in marble lobbies is tough for opponents of payday lending. So the FDIC has created a program called the Small Dollar Loan Pilot Program in an effort to meet that demand while routing around payday lending companies. Thirty-one banks with a total of 550 branches are participating, a tiny fraction of eligible institutions. Goodwill Charities has partnered with a credit union in Wisconsin to offer payday loans based on paperwork and processes identical to those of a typical payday lender but charging just $10 per $100. These ventures are minuscule compared with their fully commercial counterparts. And they aren’t growing, despite offering an identical product at subsidized rates.
The Freedoms of Payday Lending
I’d happily lay out 50 bucks, the net cost of my payday loan, to avoid awkward interactions with my phone company, my doctor, my friends, my colleagues, my bank, or, worst-case scenario, the boys in blue.
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
Bertha Lewis|9.25.09 @ 3:18PM|#
Instead of demonizing payday lenders, why not go after the major banks that own them?
Bertha Lewis|9.25.09 @ 3:22PM|#
(I'm not directing the above question to Katherine Mangu-Ward, but rather the people who want to take out payday lenders)
|9.25.09 @ 3:24PM|#
Apparently the U.S. needs something like the Grameen Bank to bypass these village money lenders by making payday loans with below-market interest rates.
|9.25.09 @ 3:28PM|#
The Grameen Bank does not lend with below-market interest rates. It has NEVER done that - they simply make debtors snitch on each other to make sure everybody pays.
New World Dan|9.25.09 @ 3:36PM|#
How 'bout we just teach the poor to, you know, budget and not pay 20% interest plus fees. If we could do that, we wouldn't have so many poor people.
I, Kahn O\'Clast|9.25.09 @ 3:37PM|#
People who use payday lenders are too committed to their xbox. wii, flatscreen, bling, whathaveyou to go the traditional rout for people who need quick cash: The pawn shop.
I am in favor of a free market, but payday lending is just another reason it is more expensive to be poor than middle class: transaction costs eat up huge amounts of wealth.
Barney Rubble|9.25.09 @ 4:00PM|#
Choice is good, except when our overlords deems we are making bad ones.
John Tagliaferro|9.25.09 @ 4:06PM|#
(I'm not directing the above question to Katherine Mangu-Ward, but rather the people who want to take out payday lenders)
As long as she splits the check I will take her anyplace.
AssWipe|9.25.09 @ 4:07PM|#
"I am in favor of a free market, but payday lending is just another reason it is more expensive to be poor than middle class: transaction costs eat up huge amounts of wealth."
Not as much as lottery tickets. There is a reason the poor don't have money and it isn't due to capitalism or free markets.
AssWipe|9.25.09 @ 4:08PM|#
And a t $5.00 a pack, why do the poor smoke? Most of the "homeless" do too.
AssWipe|9.25.09 @ 4:08PM|#
You can fill your belly on $5.00/day.
Xeones|9.25.09 @ 4:16PM|#
And a t $5.00 a pack, why do the poor smoke?
'Cause the evil tobacco companies force them to by filling their products with all that smooth, delicious nicotine. Duh. Tow the lion, dude.
It's racist and/or fascist to say that people should be responsible for their own choices in life, after all.
|9.25.09 @ 4:21PM|#
Homeless people suck at geography. There are an awful lot of them suffering through northern winters. With all that free time, you'd think they'd start walking south.
Tony|9.25.09 @ 4:23PM|#
If you're addicted to something, is it really a choice?
|9.25.09 @ 4:32PM|#
There are alternatives to payday loan places so the poor people that you refer to have options, THEY CHOOSE not to go elsewhere because they don't want to be bothered with financial literacy courses or other "hassles". The "government" put a 36% cap on the interest rates that payday loan shops can charge consumers, so the payday loan shops choose to stop making payday loans, so it's the government's fault? Please, these PREDATORY lenders are in it to make money not help people, otherwise they would continue to offer the loans at a reasonable rate. I say let the people go where they will, but don't complain when you're deeper in debt because of your poor choices.
ghost crabs|9.25.09 @ 4:37PM|#
"If you're addicted to something, is it really a choice?"
There are many addiction clinics that cater to the poor.
|9.25.09 @ 4:45PM|#
yes Tony, it's still a choice...
Jordan|9.25.09 @ 4:54PM|#
Nobody is born addicted to nicotine.
|9.25.09 @ 4:59PM|#
You know what's the best idea by far? Don't by things you can't afford! It's so simple! You see that Hummer? Back away from it! If everyone had a fucking brain, no one would be in debt!
|9.25.09 @ 5:25PM|#
If you're addicted to something, is it really a choice?
Yes - a person can be addicted to sex, but that does not mean he o she will invariably rape a person. And people HAVE stopped using drugs on their own, as statistics have shown (mentioned many times in Reason.)
|9.25.09 @ 5:44PM|#
Just once I'd like to see one of the compassionate politicians supporting the clampdown on rates visit their local payday loan outlet, explain to the hard-working people waiting in line how they're too stupid to make their own decisions and that they need to be protected from themselves, then wait to be thanked for their kind gesture. We can videotape the awkward exchange at post it on You Tube, Lonewacko style!
|9.25.09 @ 6:24PM|#
I kind of view payday loans and lotteries as special taxes on people who are poor at mathematics. Give government a share of the profits on payday loans just as it profits from lotteries, and government will quickly find some other injustice to pick on.
|9.25.09 @ 6:50PM|#
Excellent article, but note that at most payday loan stores across the country a $100 loan costs $15 or $20, not $15 plus a $20 fee, so the total payback is $115 or $120, not $135.
In my opinion usury laws are an authoritarian tradition which should have been abolished along with the tradition of slavery. They are a gross violation of freedom of commerce, or the right of citizens to engage in honest, mutually agreeable economic transactions (where no dangerous goods are involved).
The fact is that you cannot draw a line between a "reasonable" and "excessive" rate of interest on a loan. Small-dollar short-term loans, which can be extremely useful for many people and life-saving for some, must carry a high APR because the lender only receives interest on a small amount of money for a short period of time, and needs to recover costs.
If the free market should work anywhere it is in the field of small loans, because so many people can enter the business with so little expertise or expensive equipment or even capital, if you have good credit, as you can borrow the money which you will lend. Yes, there needs to be strong disclosure requirements and enforcement of debt collection laws, but beyond that the cost of loans is appropriately set by the dynamics of supply and demand.
Consumer protection is supposed to be about curbing dishonesty and harrassment, not telling merchants and service providers how much they can charge.
And if lenders are "responsible" for ensuring that borrowers can afford their loans, then why shouldn't other merchants and service providers be similarly responsible? Before long you won't be able to buy anything without the seller being required to investigate your finances to determine if you are making a wise decision, in the view of the state. This is simply 1984 big brotherism.
People should think twice before jumping on the bandwagon of the current Salem-witch-hunt-like crusade against payday lending.
|2.15.10 @ 6:16PM|#
excellent comment...rational and well thought out.
MNG|9.25.09 @ 7:28PM|#
I'm against restrictions on payday lending, it's bad paternalism. The poor find these things useful, we should respect their choices. Liberalism should be about expanding choices for most, not shutting them down.
|9.26.09 @ 12:00AM|#
This is rather non-sequitur, but was it not the fact that Christians prohibited Jews from most professions, rather than Jewish views on usury, that resulted in the concentration of Jews in moneylending?
|9.26.09 @ 3:37AM|#
The "government" put a 36% cap on the interest rates that payday loan shops can charge consumers, so the payday loan shops choose to stop making payday loans, so it's the government's fault?
Yes, it is the government's fault. If you think 36% interest on unsecured, no qualifying loans is a profitable endeavor, why don't you go into the payday loan business yourself?
Here's the math: lend $1000 with a 10% default rate. At 36% interest, that's a gross return of $1224.00. But don't forget costs; that's an average of $12/$100 according to the article. That would be $120 in costs, netting you $1104. Congratulations, a 10.4% return. Not much better than the stock market, and hardly worth the business risk considering you'd get more in CDs at a 14% default rate and start losing money at ~17% default rate.
robc|9.26.09 @ 8:34AM|#
If you're addicted to something, is it really a choice?
There are those who think that life
Has nothing left to chance
With a host of holy horrors
To direct our aimless dance
|9.26.09 @ 12:10PM|#
Bob Smith, you are talking about lending $1000 at 36% interest over a period of a year, with a default rate of 10%. That is something of a profitable venture, but it does not apply to payday lenders because they lend to people who do not have good credit and cannot borrow from any other source, by and large, other than overdrafting their bank account or bouncing checks. That is why the lenders make short-term loans to these people, using post-dated checks as collateral, because to make long-term loans to them would result in default rates way higher than 10%. A 36% rate cap would abolish short-term lending and make all loans, other than ones based on charity, unavailable to payday loan customers.
|9.27.09 @ 9:49AM|#
The truth of the matter is that if you can afford to pay the interest you can afford to not borrow it. People need to stop spending money they don't have. You claim it is to pay the electric bill or phone bill but the truth is they spent that money to go out to dinner or a movie or the bar. now they need to borrow money to pay the bills.
Steve in Clearwater|9.27.09 @ 1:58PM|#
As a two-income, essentially stable couple, we've used payday loans here about six times a year for past few years.
In Florida, it's 10% for two weeks and thus we've paid around $400 in fees to help assure we avoid late fees with utilities, landlord or car payments.
One note however - In Florida, if your collateral check to the lendor bounces, you are not just looking at "collection agencies". You're facing potential criminal charges for passing bad check(s). I'm betting it's that way in most states, which at the end of the day is what helps assure that 90% of loans are repaid on time.
zoltan|9.27.09 @ 4:41PM|#
With all that free time, you'd think they'd start walking south.
Nooooooooooooo, we have enough here in Austin already. The difference is, there are probably way more homeless shelters in the North than South, and no one wants to deal with these summers without air conditioning.
|9.28.09 @ 10:34AM|#
Regulation limiting choice makes things worse. If is slightly off topic but here is an example. The Feds are limiting overdrat fees so now banks are going to start returnign the checks and charging NSF fees. So instead of being overdrawn and having one $30 fee your check will be retunred and you will have two thirty dollar fees and the embarrasment of having to go back and pay the fee where you wrote the check. Sound sliek a good deal to me.
maz|9.28.09 @ 3:44PM|#
Many credit card companies charge a fee of $59 for late payments. It would be cheaper to pay the high personal loan fee many times, than that of a late payment, if you had extenuating Circumstances one month. These loans can be dangerous and people can fall into traps; However, that falls under personal responsibility. Many of the large banks that own credit card companies, do not like these loans, because it cuts into their profit margins. They would just rather their friends in Washington Wright bills to help eliminate there competition.
|9.28.09 @ 5:31PM|#
Actually, I'm not totally against limits.
A a lender can't make money at 36%, maybe they shouldn't be in business. Just like if a investment house can't make money at say 10x leverage or so (instead of 30-50x like they were), then maybe they shouldn't be trying to do what they do.
I guess what I'm saying, is poor people, and bankers are both to stupid to manage money properly, lol
LarryA|9.28.09 @ 6:35PM|#
Please, these PREDATORY lenders are in it to make money not help people, otherwise they would continue to offer the loans at a reasonable rate.
RTFA. All the lenders that offer what the government (and you) consider "reasonable rates" have to be subsidized to break even.
There are dozens of payday lenders, and they compete for business. If any of them was making a big profit, the next shop down the street would undercut them.
I guess what I'm saying, is poor people, and bankers are both to stupid to manage money properly, lol
If you compare the money-management track record of poor people and bank managers to that of the U.S. Congress, the poor come off looking good.
"You have to attend a financial literacy class," says Schein
Haven't had to do that yet, but I have recent experience with required government employment classes. The quality of information and instruction is truly amazing. Not in a good way.
What consumers really need is protection from government.
Pingback| 10.1.09 @ 10:59AM
Reason Magazine : Payday of Reckoning | Daily News Headlines links to this page. Here’s an excerpt:
|10.5.09 @ 9:35AM|#
Consumers facing a necessary expense and caught short between paydays must often choose between costly and undesirable options: pay the bill now and face bounced check or overdraft protection fees; pay the bill late and incur late penalties; borrow from friends and family; or take out a loan from an unknown Internet lender.
Removing one option in today's environment will only force consumers into more expensive, less desirable and unregulated alternatives. Payday advances are two week, not annual loans. For each $100 advanced, customers pay a typical fee of $15-$17. Because payday loans are two-week loans they cannot be offered at the same annual rates as annual credit products such as credit cards, auto loans and home mortgages. The only way to reach the much-hyped triple digit APR is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen.
Pingback| 10.10.09 @ 4:34PM
Big Government » Blog Archive » Consumer Financial Protection Agency: Big Brother Pro links to this page. Here’s an excerpt:
Pingback| 11.30.09 @ 11:55AM
¤ Fast Cash Advances & Payday Loan Offers – 30-Day Payday Loan ¤ links to this page. Here’s an excerpt:
Pingback| 1.1.10 @ 3:53PM
Paid Out: Washington State Makes Life Harder For The Poor - Ethan Epstein - epstein' links to this page. Here’s an excerpt:
Pingback| 1.3.10 @ 5:48PM
Making life harder on the working poor links to this page. Here’s an excerpt:
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