Discovering the payday loan crisis

Jason F. Wright

I am a survivor. I recently completed a 6,500-mile mini-van journey with my wife and three young children. We drove through 19 states, ate enough fast food to make me wish I owned McDonald’s stock, and saw the very greatest America has to offer.

Sadly we also saw the worst, and it wasn’t poverty or inner city crime. Rather it was the infestation of instant or “payday” loans shops that have burrowed like chiggers into our nation’s business districts. Their seductive neon light locations offering “EZ Money,” “Fast Cast,” and “Insta-Loans” literally dot the map. But we found they’re most prevalent in economically depressed neighborhoods and near military bases.

A cursory search on the Internet revealed some troubling facts about the industry that amounts to little more than a posse of government sanctioned loan sharks. According to a piece by Gannett News, payday loans come with annual percentage rates ranging from 182 to 910-percent. That produces a national average of 470-percent on the typical $100, two-week loan. It is inconceivable that such usury rates are legal in a country with extensive predatory lending laws.

According to a group called The Center for Responsible Lending, more than 5 million Americans are caught in the trap of payday lending. The costs to these families—many of them minorities, single working mothers, and even members of the military—is a stunning $3.4 billion per year. It is unconscionable that this industry targets their outrageously high-priced loan products to the very people who can least afford them.

The horror stories are even easier to find than the numbers. An African American woman in North Carolina started with a payday loan of “$50 of $100,” she told The News & Observer. Before she knew it she was getting one loan to pay another and racked up to $700 in high-interest debt. It’s tragic; but she’s only one of many minorities sucked into the irresistible rollover gimmick of these short-term loans. Friendly store managers reportedly call customers to tell them how easy it is to defer repaying the loan on time by simple writing another postdated check. What they don’t cheerfully explain is the concept of compounding interest.

Consider also the single mother that The Kansas City Star reported to have borrowed $300 for a trip to the dentist. When she couldn’t pay the loan two weeks later, she extended it and paid $50 twice a month for almost four months but still owed the entire principle amount. Eventually the loan was cleared after spending $650 hard-earned dollars.

A search of how military members are affected delivered equally disconcerting results. The New York Times reported in a payday expose the story of a young cash-strapped naval officer who paid 650-percent on an original two-week loan. “To borrow $500,” the piece read, “they wrote a $575 check to the lender, to be cashed on their next payday, less than two weeks away … Repaying their fast-money loan took a big bite out of the couple’s next paycheck, leaving them short when other bills fell due. So they borrowed again, and again, until they had raised about $4,000 through more instant loans… By October, just days before the petty officer had to ship out for duty in the Persian Gulf, the debts had grown so large that the couple and their young children were about to lose their home to foreclosure.”

As the Institute for Liberty motto states, “We support and defend liberty in the markets, the courts, and in the halls of Congress.” Like most free-market advocates we support the right of payday lenders to do business and earn profits, even at healthy margins. But at what point do their rates become irresponsible? The 1970 anti-mob RICO Act made loan sharking—charging twice a state's maximum rate—a federal crime. But today at over 22,000 payday and check cashing shops customers will fall for rates ten-times or more the state maximum.

If we’ve learned anything in recent weeks, it’s that our government tends to react to crises rather than prevent or prepare. It’s time for those in power to reign in this tide before it claims a generation of low-income borrowers. It’s time to implement reasonable rate caps and sensible limits to the number of loans lenders may make to the same customer each year. Most of all, it’s time for our leaders to assert responsibility over an irresponsible industry.

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Jason Wright is the President of The Institute for Liberty, a Virginia-based think-tank that defends and promotes liberty in the markets, the courts, and in the halls of Congress.

jw@instituteforliberty.org