The explosive growth of payday advances is recent, so states are just now amending, and trying to keep up with, changes needed in financial laws to cover both conventional installment loans and brief payday loans. A 2010 Illinois Department of Financial Institutions report showed the number of U.S. payday–loan stores doubled to 6,000 in the 2000s. In the next decade, the industry predicts 600 percent growth.
The 1998 “Growth of Legal Loan Sharking” report by the Consumer Federation of America said high profits will continue to spur growth in the market. Financial Service Centers of America, Inc. (formerly the National Check Cashers Association) attributed industry growth to the increasing “niche” market for short-term cash advances for sums less than $500 that are unavailable from traditional lenders.
Often, people will refer to an annual percentage rate or APR as a means to compare payday fees to the cost of other financial transactions, such as mortgages. CFA, which represents consumers, in February 2000 used this example: A borrower writes a $115 check to receive $100 from the lender. When the lender cashes the check, the borrower has paid 390 percent APR for the payday loan. “No consumer deserves to pay 400 percent APR on a two-week loan,” said CFA’s Jean Ann Fox.
A 2010 analysis of California AB 425 disagreed with this comparison. The analysis reported, “Expressing the terms of this transaction as an APR is not a fair comparison. An APR is a calculation made over a 12-month/ 365-day period. To attempt to compare the cost of a transaction that has a maximum life of 30 days and calculate it as though it has a 365-day life is clearly illogical.”
The Community Financial Services Association, a membership organization of payday cash operators, contends it is unfair to compare short- and long-term interest rates. “APR is rarely used to explain costs of other services with fixed fees, such as: A $1.50 fee on a $100 ATM transaction is 547.5 percent APR or a $22 NSF bounced check fee on a $100 check would be 8,030 percent APR,” CFSA said.
The industry calls payday loans the taxicab of the financial world, in that no one would measure the fare for a trip across town the same as a trip across the country. A taxicab is meant for a short trip in the same way as a payday loan is meant for a short time, and for either one the customer pays more proportionately. And the 1999 Illinois Financial Department report said that while payday advance fees are “exorbitant,” they could be compared to increases in banking fees across the country.
Loans made against a check may be secured or unsecured by collateral. With a tire loan, a borrower who fails to repay may forfeit his or her car. Many payday lenders do not require security, and rely instead solely on the borrower having a checking account and a job. In addition, the CFSA, representing the industry, has a “Best Practices” guideline their members follow. Members do not endorse criminal prosecution, including forfeiture of collateral, under their “Best Practices” guideline.
One payday lender said these loans cost more because many operators write off their bad debt, rather than pursuing criminal or civil recourse. “Our main enforcement tool with customers is simply not to loan to customers again who do not make good on their obligation,” said Cash ‘n Go Government Affairs Vice President John Rabenold. “It takes an operator about seven good advance transactions to cover just one loss.”
Economist John Caskey of Pennsylvania’s Swarthmore College, who does not endorse payday lending, agreed that the industry needs relatively high fees to survive. “Somewhere near the range of $10 or slightly under on a loan of $100 for about two weeks is where you start seeing they (payday–loan operators) can’t operate,” he told The Christian Science Monitor.
The “typical” customer
Consumer advocates and industry representatives disagree both on the vulnerability of borrowers, and even on who the borrowers are.
Fox of the Consumer Federation of America said, “Data in Illinois and California indicate payday borrowers have an income of $23,000 to $25,000.”
A 2000 New Mexico industry study by the Financial Institutions Division said small-loan borrowers (a field much broader than just payday loans) have average annual incomes of more than $30,000 and are an average 35 years old. A national 1999 CFSA industry study found that the average customer is 35 years old and earns more than $33,000 a year.
Detractors of payday loans maintain that interest rates are too high even if borrowers are not poverty stricken. Fox said, “Even if it is $35,000, as the industry claims, no consumer deserves to be charged 400 percent APR on a two-week loan. It is an unacceptable form of credit. A person making $35,000, even, cannot afford to pay these loans off the next payday and they borrow again.”
But figures from several states show few complaints against the industry. “Since March of 1999, we have had maybe 11 complaints, which is very few,” said spokesman Dennis Ginty of the Ohio Department of Commerce. “Of course, our law does have a $500 per-check limit with no rollovers, and a maximum on fees charged which equal $115 for $100 on a two-week loan.”
Illinois’ 1999 report says that the number of complaints is low, and that most are a result of miscommunication, not law breaking. However, the report notes that some customers may not be aware of their options to complain or may not realize a violation has occurred.
Washington state Director of Consumer Services Mark Thomson said in 1999, “While payday–loan businesses charge a lot of money for a loan, we are not seeing many complaints…. That’s because consumers understand what they are doing and are willing to use the service even if it costs more.”
States also are looking into the practice of rolling over payday loans. Customers who reach the end of their two weeks and cannot cover the check to their payday lender may seek to roll over or extend the loan. If the loan is extended, additional fees are charged for repayment of the loan at a later date. Some feel this allows, even encourages, borrowers to get in a downward cycle on loans. Some states have limited or banned such rollovers, and others are considering similar legislation.
A consumer choice?
The Chicago Tribune said in an editorial last year that payday–loan operators are niche lenders focusing on a market ignored by just about everyone else. A payday customer said, “If you don’t get there (to your lender) in time and do what you are supposed to do, there can be problems.” The Tribune said, “That is absolutely true. Responsible adults must meet their obligations.”
The questions for states are whether payday loans should be allowed, and if so, how to set rules for contracting these obligations.