Thursday, September 30, 2010

Our View - Iowa should cap interest rates for payday loans

Printed in the Iowa City Press-Citizen, Jan. 8, 2010.

When the Iowa Legislature reconvenes on Monday, lawmakers will be focused primarily on figuring how to balance the state's budget in a way that spreads the pain around and that causes the least amount of damage possible. And with the session shortened from 100 days to 80 days, there won't be a lot of time for lengthy debates on other issues.

Although we want our legislators to manage their time effectively, we also think that there are a number of non-budget issues that require their attention -- especially in this time of economic uncertainty. One of those issues involves setting caps of the interest rates for payday loans.

Lobbyists from the payday loan industry often defend their product as a means of "protecting consumer options." Temporarily cash-starved people, they argue, should have the option to take out a short-term loan at a higher percent rate -- especially when the interest paid would add up to less than the fee for a bounced check or a late payment. Having government set artificial limits on this free market, they argue with fist-pounding indignation, would hurt both consumers and businesses.

Perhaps the defenders of this industry would be right in making such statements -- and in expressing such indignation -- if the majority of payday loans actually were taken out by people who need only a temporary infusion of cash to get through an unexpectedly harsh economic period.

But the Iowa Division of Banking statistics for 2008 found that about half the payday borrowers in Iowa take out 12 loans a year, or one per month. And the Center for Responsible Lending reports that nationally the average payday loan borrower takes out 8.7 payday loans per year. The center also reports that about 60 percent of payday loans go to people with more than 12 transactions per year, and about 24 percent go to people with more than 21 transactions per year.

It would seem that the industry is designed not to help people get back on their feet but to ensure that people stay within a cycle of debt.

The industry defenders are right when they say that a $15 fee on a two-week, $100 loan is less than the fee a bank may charge for a bounced check or a credit card company for a late payment. But that's only if the fee is paid right away.

While the industry defenders would like to describe such a fee as being a mere 15 percent, it actually represents a 390 percent annual percentage rate. If the borrower is unable to pay back the loan right away, then that interest rate begins to add up and to start transforming "the cash-strapped" into simply "the trapped."

With more Iowans and other Americans facing financial uncertainty, we think our state legislators should take some time to talk about the dangers inherent in this loan option. We're glad to hear our local legislators pushing so hard to encourage borrowers and other lenders to develop workable alternatives to payday loans -- such as credit-union loans, small consumer loans, emergency-assistance programs and consumer-credit counseling.

During the next legislative session, we hope the Iowa Legislature does for the payday loan industry what it did for the car-title loan industry a few years ago: Set a reasonable cap on the annual interest rate that such lenders can charge.

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