It’s been a while since I blogged about payday lending, so let’s recap a little bit.
Payday loans are made in small amounts but come at an extremely high cost, typically carrying annual interest rates of 300% or higher. They are called payday loans because they generally must be paid back in full, with all interest and fees, on the borrower’s next payday. Believe it or not, payday borrowers are twice as likely to file for bankruptcy as applicants whose request for a payday loan was denied by the lender.
Pennsylvania does not currently have thousands of payday loan storefronts as you will find in states like Florida and Utah because our state law puts a low cap on the interest and fees that payday lenders can charge. Loyal readers will remember that in the last legislative session Rep. Chris Ross of Chester County introduced—and the House passed—legislation to open the door to payday lending in Pennsylvania. The bill died in the Senate.
Ever since, payday lenders have been lobbying state Senators to reintroduce the bill. Their efforts paid off late Friday afternoon when Senator Pat Browne introduced Senate Bill 975 and hastily scheduled a vote on the bill in the Banking and Insurance Committee today.
Senator Browne says that his legislation responds to criticisms raised about last session’s bill. So let’s review what exactly is in Senate Bill 975:
- SB 975 allows a total of $38.22 in fees on a $300, 14-day loan. With these fees, this loan could carry a 332% annual percentage rate (APR).
- In addition to the high cost, SB 975, just like last year’s bill, explicitly authorizes other predatory terms such as requiring direct access to a borrower’s bank account as a condition of the loan, thus allowing the payday lender to stand first in line for repayment on payday.
- SB 975 allows at least eight “consecutive short-term” loans with excessive fees and interest exceeding 300% APR. This eight-loan limit is not really a limit because a borrower need only wait three days to borrow again and the loan count is reset to zero. So essentially there is no limit. As the U.S. Department of Defense explained, even when periods between payday loans are separated “by a couple of days or a week, the borrower is still caught in a cycle of debt.”
So the key features that made last year’s effort to expand payday lending such a bad idea remain in effect.
One difference: this time around Senator Browne is calling it a “micro loan” program. Many of you may have heard of micro-lending, a program first made famous in Bangladesh, in which very small loans are made to people to start small businesses. (While initially these programs were praised, later evaluations have shown them to fall short.)
When people hear “micro loan,” perhaps they will think of the franchise Ten Thousand Villages, which sells fair trade baskets, jewelry, and crafts made by people from poor communities all around the world. That is certainly a better image than what comes to mind when you hear that lawmakers are contemplating short-term loans that charge an APR over 300%.
The reality is payday lending, by any name, takes advantage of people in financial distress. It compounds their problems by trapping them in a cycle of borrowing that, while profitable for the payday lender, often leads to more financial distress for the borrower, including bankruptcy.