If a family falls a little behind, and needs a little cash, a so-called “payday lender” may be more than happy to help out. In Indiana, a down-on-his-or-her-luck applicant can get a two-week loan for up to $605. But the interest rate can be a backbreaking 20 percent for those two weeks – an annual percentage rate as high as 391 percent. And those loans are often made without regard for whether the borrower can repay such high interest.
“It's a vicious cycle,” said Glenn Tebbe, executive director of the Indiana Catholic Conference.
A loan is taken out to cover one household need but, to repay it, the family has to scramble to pay for another essential. “Two to three weeks later, they're in the same spot that they would have been,” he said. “It's really taken advantage of people in vulnerable circumstances.”
According to a release from the Indiana Institute of Working Families, “The average payday borrower takes nine or 10 loans per year, paying over $400 in interest to repeatedly borrow $300. Sixty percent of borrowers in Indiana take out a new loan the same day their old loan is due.”
Last week, the U.S. Consumer Financial Protection Bureau issued a rule that may help reduce the problem in Indiana and other states that allow these sky-high interest rates. The rule, scheduled to take effect in 21 months, will require lenders to evaluate borrowers before a payday loan is granted.
“Instead of just letting the lender look at the paystubs, the proposed rule would require the lender to do the same kind of prudent investigation that other lenders do,” Tebbe said.
But the federal consumer bureau is not allowed to regulate interest rates on those loans in Indiana. That would have to be done through the state legislature, where consumer advocates have for the last two years been playing defense.
Last session, a bill to allow payday loan operations to offer loans between $605 and $2,500 for up to two years at an annual percentage rate of 240 percent died in committee. That could have saddled a struggling family with $9,600 interest on a $2,500 loan. Maggie Clifton, public policy manager for Indiana United Ways, said Monday she expects payday loanmakers to be back at the legislature this winter with other new “products” to work around the proposed federal rules.
In addition to gearing up to fight new ways of overcharging the poor, consumer advocates are also hoping to persuade lawmakers to require more reasonable interest rates on traditional payday loans.
A danger with pushing such legislation is that it could be co-opted by pro-payday-lending forces, David Nicole, president and CEO of United Way of Allen County, said in an interview Monday. “Do you go on the offensive, or do you stay on the defensive? Those numbers can change really fast. It doesn't take a whole lot for a good law to be turned into a bad one,” he said.
But, he added, “we advocate against predatory lending.”
Perhaps if consumer-advocacy groups can build some momentum for rolling back interest rates, it could help head off efforts by the payday loan industry to expand its offerings. What's needed is a courageous legislator or two to lead the way.