Lost in the political headlines this fall was the release of a report reminding us what a truly bad deal payday loans are for borrowers, especially those who end up in a vicious cycle of one loan after another.
With interest and fees, the cost of repeated payday loans adds up to an annual percentage rate of more than 400 percent, according to the California Budget Project. Its very understandable presentation is available on its Web site, www.cbp.org. (Click on Publications; the report came out in September).
The Budget Project, an independent nonprofit, analyzes state budget and policy proposals, usually from the perspective of how they affect low- and middle-income families. Its report on payday lending is not tied to a particular bill but rather reinforces the concern that thousands of Californians are being caught up in a chronic and expensive pattern of payday borrowing.
How does payday lending work? A person goes into what is essentially a money store and writes a check for, say, $300. He receives $255 in cash. The difference, the fee of $45, calculates as 17.6 percent annual interest, if it were just a loan until the person's next paycheck comes in. But borrowers frequently don't pay off the loan and walk away. They pay the first loan, but immediately borrow again, and again.
According to an example calculation by the Budget Project, the fees will exceed the loan after six consecutive transactions. And according to a 2007 survey, nearly half of all payday borrowers take out payday loans at least once per month. It is this tendency to dig deeper that makes payday loans such a bad idea.
Payday loans have been around since the mid 1990s, and financial experts long have stressed they're not a good way for consumers to climb out of debt.
Michelle Singletary, whose financial column "The Color of Money" appears Saturdays in The Bee's Work & Money section, wrote in February 2007: "Using a credit card to buy things you can't pay off the next month is bad enough, but to borrow against your next paycheck is the very definition of irresponsibility. It's an incredibly unwise financial move."
The federal government became so concerned about military families getting mired in debt through payday loans that it capped interest rates at 36 percent on consumer loans to military members, effectively banning payday loans to members of the military. A 2007 bill passed by the Legislature and signed by Gov. Schwarzenegger allows the state to enforce that federal law in California.
Other legislation to curb payday lending in California has not been successful. We believe that the best way is to educate consumers on the huge fees and to point out that alternatives are available to most people.
A number of credit unions and banks offer small personal loans at much lower interest rates. Even credit cards with moderate fees and interest rates are less expensive than payday loans. (The Budget Project provides a comparison chart.)
This issue is especially important in the Central Valley, where we have a high concentration of payday lenders because we have so many low-income residents. They are attracted to payday loans because they are quick and require no credit check. It's easy -- but enormously expensive.
The foreclosure crisis has demonstrated that many consumers aren't money smart. Teachers, credit counselors and others need to help educate the public on the high cost of payday lending. This Budget Project report can help them do so.
Source:http://www.modbee.com/opinion/story