Payday Loans
Rep. Mark Ferrandino, sponsor of HB 1351 testifies 3/8/10
A Longmont resident in the CPWD “Bridges out of Poverty” class has found that Main Street Longmont has 17 Payday Lending stores. Because the Colorado legislature is now considering capping the payday lending percentage at 36% and CPWD is actively working to understand the financial barriers that prevent our community from achieving independence, I felt this would be a good topic for the first installment of the CPWD blog.
The first thing about payday loans that the industry wants you to believe is that it is a “product” like a toaster or fried chicken. They oppose “government regulation” that will cost needed jobs; after all, this is America. The payday industry claims that they fill a necessary gap in lending and credit, many of their customers are middle-class and without payday short-term credit, working class people couldn’t get a needed car repair, pay late bills and avoid marks to their credit.
But the “loan” is a trap. Although low-income members of our community may need short-term credit choices, payday lending as it now exists in Colorado drives off reasonable lending products that could help really help people in emergency situations.
Mercy Salazar was the first payday borrower to testify to the Colorado House Judiciary Committee today. She needed $500 for car repairs and paid $575 for the first two weeks. Unable to pay the principle $500 back, she paid another $75 next payday.
In 2000 when the state legislature created this payday system, they legislated that a borrower could only refinance a lone once (pay the fee again). But the payday loan business in Colorado has a way around this common-sense regulation; customers may take out a new loan the moment they pay off their existing loan. These multiple “short-term” loans really are extremely high-interest loans.
There is no payment option, so a borrower may pay off part of the principal over time when they take out the loan. The payment plans are only offered after someone has been caught in the spiral. Ms Salazar told of how she was stuck in this trap, continually paying $75 a month because she was unable to scrape together the $500, paying eventually many times more than the value of the loan.
Rep. Ferrandino says that the payday industry is not providing access to credit, “it is access to debt.” He also confronts the lost payday jobs by suggesting reasonable lending rates would pump $80 million dollars into the Colorado economy.
Because payday loans are so available and profitable, there are few comparable or competing loans from traditional institutions. Rich Jones of the Bell Policy Center told how the payday loans were crowding-out alternatives, banks and credit unions for the market.
Finally, I think about Main Street in Longmont. Three and a half billion dollars are squeezed out of customers nationally in these fees. This is not the cost of the first loan, which the payday industry contends is so needed in our community; those are the billions in a bonanza that the payday industry takes from many who cannot afford it after the next payday.
Rene Beauregard observed that the past Colorado legislation on payday lending is much like the payday industry itself, “the need was created by the solution.”