A phenomenon of the changing banking and personal finance business has been the rise of so-called “payday loan” companies, which offer consumers a convenient yet competitive way to meet their short-term cash needs. These aren’t “loan sharks” or fly-by-nighters, but finance companies that are serving a niche market largely abandoned by banks and larger lenders.
Because a small percentage of the people who get payday loans wind up in deep financial trouble, largely because of unrelated credit problems, some groups are trying to encourage the Legislature to impose new regulations or to cap interest rates. (See related guest column on this page.) That approach not only misreads market demand but also will hurt more low- and middle-income people by raising costs and drying up a valuable source of capital.
Before the Legislature acts on any regulations, it should monitor the results of a promising new partnership between most of Wisconsin’s payday loan companies and the nationally known Consumer Credit Counseling Service, a division of Family Service of Dane County.
The Wisconsin Deferred Deposit Association, which represents the lenders, has forged an agreement with CCCS to provide consumer debt counseling services to customers in financial jeopardy. The credit agency will work closely with the lenders to provide training in consumer debt management assessment — and customers will gain access to CCCS counselors at no cost.
This pilot program will identify people with credit problems before they dig a hole that’s too deep. That’s good for the consumer and good for the companies, which don’t want to make loans to people who are already in over their heads.
“This is not a way to finance a lifestyle. This is a way to manage a short-term cash flow problem,” said Sam Choate of Community Financial Services Association of America, a member of the Wisconsin Deferred Deposit Association.
According to statistics from the association, only 5 percent of its customers have serious credit troubles. In the first eight months of 1999 in Wisconsin, 67 people listed payday loan companies on personal bankruptcy petitions. That’s out of more than 10,000 petitions filed.
The payday companies say their average loan customer is about 35 years old, earns $26,000 a year and has a manageable consumer debt. Those who wind up in financial trouble — skipping from one payday loan company to the next — are usually in deep trouble long before they attempt that move. Usually, the root problem is credit card or other consumer debt. Learning how to manage that debt is where CCCS will get involved, through daily cooperation with the payday loan companies.
Why don’t more people go to banks for emergency loans? Because the cost of generating a bank loan is too expensive for small amounts ($200 or $300) of money. It’s also cheaper to go to a payday loan company than to float a check and pay a fee for having insufficient funds. The average bad check fee is $30 to $40, while the payday loan cost averages about $20.
The pilot program in Madison is the first of its kind in the nation and has the potential to spread rapidly. Let the market, self-regulation and partnerships with established credit counseling firms solve the problem. Legislation isn’t needed when cooperation works just as well.