Congress should cap interest on payday loans
Patrick Rosenstiel’s recent Community Voices essay said that interest rate cap policies would create a less diverse and less inclusive economy. He states that “consumers who turn to low dollar lenders for high interest loans are making informed choices for their personal financial well-being.” I couldn’t disagree more, based on my years of working with Minnesotans trapped in predatory and usurious payday loans. As the director of Exodus Lending, a nonprofit organization that refinances predatory payday loans and installment loans for Minnesotans caught in what’s called the payday loan debt trap, my point is. vue is, by experience, quite different from that of Rosenstiel.
In some cases, consumers’ choices are well informed, although in many cases people are desperate and unaware that they are likely to be trapped in a cycle of recurring debt and subsequent loans, which is the intention of the lender. The average Minnesota borrower takes out seven loans before they can repay the amount originally borrowed.
Small loans, big interest
Since 2015, at Exodus Lending, we have worked with 360 people who, when they came to us, were paying an average of 307% annual interest on their “little dollar” loans. This means that the loan might not have been large, but the amount these borrowers were paying their lenders, such as Payday America, Ace Cash Express, or Unloan, certainly was. Based on what we have seen and what our program participants have experienced, we warmly support a 36% interest rate cap on such loans.
There are times when almost all of us can use a little extra cash – maybe the car battery dies; a child’s growth spurt means they need a new pair of shoes; unexpected illness or death in the family results in unwelcome expenses; etc. For many of us, there is a safety net of friends, family, or a savings account that can help us weather the storm, while we can still afford our regular expenses. For others, it is an ordeal. The answer, however, shouldn’t be a loan shark at rates of 70%, 100%, or more than 400% APR! Alternatives should be available for access people. While it may be that companies can make ridiculous amounts of money taking advantage of people in their vulnerable financial situation, that doesn’t mean it’s a good idea.
Just ask the people in the community themselves! According to the Center for Responsible Lending, since 2005 no new state has allowed high-cost payday lenders, and some no longer do. A few examples: in 2016 in South Dakota – a state little known for being ultra-progressive – 75% of voters supported the measure initiated 21, which placed an interest rate cap of 36% on short-term loans , thus shutting down the industry. In 2018, Colorado voters passed Proposition 111 with 77% of voters in favor. This also put a 36% interest rate cap on payday loans. No state that has passed laws to curb this usurious industry has overturned such legislation.
A 2006 precedent: the law on military loans
Also, it helps to know that Congress has already passed a law that worries Rosenstiel – in 2006. The Military Loans Act capped annual interest rates of 36% on small consumer loans made to members. military service workers and their families. Why? It was feared that the loans that the military were getting would pose a threat to military readiness and affect the retention of the military! In 2015, the US Department of Defense strengthened these protections.
People living in states with restrictions on small loan amounts will not suffer. Instead, they will not be exploited and taken advantage of, and they will do as they do in places like New York where such loans have never been permitted.
We advocate putting a cap on interest rates on payday loans and other loan sharks while supporting fair and equitable alternatives. Once an interest rate cap is placed on these loans, other products will emerge. Lenders will still be able to lend and make a profit, but not at the expense of vulnerable borrowers. I’m glad the US House Financial Services Committee is debating this and will support the cap!
Sara Nelson-Pallmeyer is the Executive Director of Exodus Lending.
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