Payday Lending, Part III: Will loan caps bring the return of the neighborhood loan shark?
Some time ago, a woman wrote a letter to The New York Times, explaining how her life had been pretty much ruined by a loan shark.She had borrowed $50 when her daughter was sick and had to pay three consecutive monthly payments of $22. It began a cycle where she wound up broke and then foolishly went to another loan shark. She eventually lost her job (the loan shark went to her boss when she couldn't make a payment), and finally began working at a new place of employment for a very small salary and naturally couldn't pay the loan sharks she owed money to. She ended her letter by noting that "the blood-suckers are hounding me to death."
She signed her letter, "Helpless."
The year was 1908. One hundred years ago.
Today, that same letter could easily be written, only with the words "payday lending store" in place of "loan shark." That said, a payday lending company may telephone a home relentlessly, trying to get their money back and then some. They may sue a person in court. They may help make life miserable for some people, decimate their credit score, send them into bankruptcy and financially ruin them for years to come, but at least they can't legally send someone to appear in your doorway and threaten your health, or stalk your boss.
Borrowing money with interest rates you can't afford is still a poor idea -- pun intended -- but at least predatory lending offers a safer option out there than loan sharks.
Payday lending stores started to swell in the early 1980s when many banks, angling for better profits, moved out of poorer neighborhoods. That's when the industry truly started to come into its own. It also didn't help when, in 1979, laws were loosened governing interest rates on loans. Before 1979, every state loan capped how high an interest rate could go.
Arguably, the predatory loan industry can evolve even more beyond not breaking people's legs -- much, much more. On the other hand, with 13 states having banned or virtually eliminated the payday loan practice, and many others looking like it may, one has to wonder if this path is just going to take us back where we started. Sure, plenty of people abuse the system, but I half wonder if this will just encourage anxious, occasionally-cash-strapped citizens who feel helpless to someday do something they never dreamed of doing -- like meeting a loan shark in a dark alley.
Geoff Williams is a business journalist and the author of C.C. Pyle's Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America (Rodale).
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Reader Comments (Page 1 of 1)
5-08-2008 @ 2:01PM
aclark said...
As someone who has been in the financial services industry for almost 20 years, offering products including payday loans, I'd ask that the author do additional research in this area. Most state laws cap collection fees. As an example, in California the lender can charge one $15 fee if the payday loan defaults, and interest does NOT continue to accrue. It costs the consumer more to overdraft their account to buy a $4 cup of coffee than it does to default on a payday loan. State regulations also typically ban suing for treble damages, threatening criminal prosecution, and charging additional fees above the base default rate. Lenders who are members of the national industry trade association also voluntarily agree to follow the FDCPA collection guidelines. Payday loans are a competitive option for short term credit.
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5-09-2008 @ 5:14PM
atreides said...
Bravo. I'm sad I didn't read these articles you wrote sooner.
This is one of the most sensible, balanced series I've ever read on this issue. Where most just rant and rave about how awful it is, not a lot of people have considered the alternatives, or even offered true solutions. It just goes to show that most of the people railing against payday lending are simply doing so for political gain, and dragging public opinion with it. And it's appalling to consider that you should even be embarrassed about exercising your financial options.
I think you've touched on why this issue is so popular with politicians and journalists: their audience is those who can afford credit cards, and who have multiple financial options. To these people, payday loans might seem outrageous because they can just charge their next emergency onto the visa card. The reality is, as this writer discovered, not everybody has that luxury, and to them, a payday loan is the difference between making ends meet and going bust.
What financial sense to state legislators have? While they were debating to squash this industry, unscrupulous mortgage companies were ripping people off for far more than just a couple hundred dollars. What are these states doing about that? But it's nice that you point out who has what finger in the dyke.
Again, bravo.
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5-21-2008 @ 2:14AM
Marshal said...
Connecticut does have pay-day lenders.
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5-21-2008 @ 2:16AM
Marshal said...
I've never used one,but they are up and down Main St. in East Hartford!
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