Debunking Payday Loan Myths
In the editorial “Payday Loans Are Not Harmful for Low-Income Borrowers” in The Hill’s Congressional Blog on May 6, 2016, Thaya Brook Knight of the Cato Institute explains why payday loans are a necessary product for those who need it. Knight’s defense against payday lenders comes as the Consumer Financial Protection Bureau prepares to announce new rules cracking down on the industry, which Knight says is a paternalistic intrusion.
Knight’s case rests on three arguments. First, that borrowers take out multiple payday loans per year, which indicates satisfaction with the product. Second, payday loans are used for everyday expenses like rent and food. Interrupting a borrower’s access to payday loans would jeopardize their ability to pay these necessary expenses. And finally, that payday loans are necessary due to the lack of suitable alternatives. These arguments represent a fundamental misconception about payday loans, the dangers they present to borrowers, and a refusal to reform a failed industry.
Knight cites a study by Pew Charitable Trusts which examined state regulatory data and found that borrowers take out an average of eight payday loans per year, worth a total of $ 3,000. Knight argues that the concept of “coming back for more” should represent a borrower’s satisfaction with the payday loan, but this is far from the truth. Often, payday lenders entice borrowers by promising them reasonable interest rates, only to increase rates dramatically when the borrower extends the repayment schedule. The borrower is then forced to take out additional payday loans to cover his delinquencies, creating a mountain of debt. Knight says borrowers are no longer in debt on a payday loan in five months, but that doesn’t take into account the additional debt they incurred from subsequent loans.
It is a cycle that I have seen far too often among my constituents in New Mexico. About one in four New Mexicans have turned to securities and payday lenders charging interest rates of 300% on average. The average borrower takes a $ 630 loan and spends $ 1,250 to repay it over a four-month period – if they can afford to repay it. Many refinance the original loan or borrow additional money just to pay the interest on their original loan and find themselves spiraling into disastrous debt. Their cars are foreclosed, rent, utilities and other critical bills go unpaid, and their children are deprived of basic necessities.
This cycle of indebtedness is particularly worrisome considering that, according to Pew, the borrowers surveyed use payday loans for expenses such as rent, food and utilities. A borrower unable to repay their loan – who may already have thousands of dollars in debt – could risk losing their home or not being able to put food on the table. The idea of going into debt just to get out of it is unimaginable and must be mastered. This is why the Pew study cited by Knight concludes that “the payday loan industry sells a product that few people use as designed and that imposes a debt that is consistently more expensive and longer than it is. ad.
A flawed payday loan system, according to Knight, still provides a valuable lifeline for those in need. But if the existing system endangers the credit and the future of its borrowers, what value can it really have? The solution, according to Knight, is to develop new and better products to compete with payday lenders. On this point, we agree. Consumers should have expanded options not only to get the best deal available, but also to avoid having to make a deal with a predatory payday lender.
That’s why I partnered with the Coalition for Safe Loan Alternatives, an organization that brings together local banks, community and religious organizations, and consumer advocates nationwide to develop innovative alternatives to payday loans. We are already seeing that the work is paying off. One of our coalition members, Employee Loan Solutions, offers affordable and secure loans through its TrueConnect program.
TrueConnect partners with employers, allowing them to offer loans to their employees at a reduced rate compared to traditional payday loans. This year, the NM State Senate passed SM 27, a memorial asking the State Personnel Office to investigate the possibility of making this free and risk-free benefit available to State employees. Surveys show that one in five government employees has taken out small loans with triple-digit interest rates. With salaries largely frozen due to tight budgets, there couldn’t be a better time to provide this service.
In addition, community organizations like Native Community Finance offer low-interest financial products and help people trapped in predatory lender debt refinance their loans at affordable rates.
We are doing our part to develop alternatives to payday loans, but there is still work to be done to harness the industry. I hope the Consumer Financial Protection Bureau will recommend strong action against predatory lenders who take advantage of borrowers in need, locking them into perpetual debt and destroying their credit history.
As Thaya Brook Knight acknowledges, loans are needed to help those in need. I couldn’t agree more. The only question is whether those who are able to help will do so responsibly and safely. For the sake of millions of people in need, I hope these changes will take place as soon as possible.
Javier Martinez represents District 11 in the New Mexico House of Representatives and is policy director and general counsel for the Partnership for Community Action.