For a family just making ends meet, an unexpected expense – a broken down car, a broken water heater, emergency medical care, etc. – can force difficult choices. For people who don’t have the luxury of borrowing from financially stable family or friends, and for those with less than ideal (or perhaps nonexistent) credit histories, a loan payday may appear to be the most promising option.
Payday loans are short term loans that last for about the duration of a typical pay period (14 days). Essentially, high-risk borrowers use a payday loan as an advance on their next paycheck, and the lender charges a fee for the service.
The numbers show how popular payday loans are in Indiana. According to a report from the Center for Responsible Lending, Hoosiers borrowed $ 502.9 million in payday loans and paid $ 70.6 million in related finance charges in 2013. In Marion County, there are 92 loan stores on salary, more than the number of McDonald’s and Starbucks stores combined (71).
Jessica Fraser, program director for the Indiana Institute for Working Families, said that while payday lenders provide a necessary service to people who might otherwise be excluded from financial institutions, they are not without drawbacks.
A major concern is the possibility that a borrower could get stuck in a debt trap – a cycle of repaying and then borrowing payday loans, accumulating finance charges along the way.
Another major concern: high interest rates.
“We know that businesses have to be profitable; we know people need access to credit. But there has to be a way to do it without having such high rates, a way for them to make a profit and for people not to be taken advantage of, ”Fraser said.
According to a report from Fraser’s organization, Indiana law does not limit the annual percentage rate (APR) that can accompany a payday loan, but “finance charges essentially cap the APR at about 391%.”
“Thirty-six percent APR is the most we can support in good conscience,” Fraser said of the Indiana Institute for Working Families.
Fraser said Indiana also limits payday loan principal and finance charges to 20% of a borrower’s income, but research indicates low-income borrowers can only pay up to 5% of their income. income on these loans while being able to cover living expenses and avoid borrowing again. of the lender.
So-called cooling off periods – the time a borrower has to wait before borrowing again – is another contentious area of payday loans. Fraser said the institute would study cooling off periods over the summer to identify best practice, but across the country those periods range from 24 hours to 45 days.
These concerns and more, including the fact that payday lenders are clustered in poor areas and sometimes seen as taking advantage of the needs of borrowers, explain why the Federal Bureau of Consumer Financial Protection should issue new lending regulations on the Internet. salary. Fraser said there was a lot of speculation about the new guidelines, but no clear information yet on what the rules might entail.
But Indiana Representative Woody Burton, R-Whiteland, said news circulating about the potential new regulations prompted payday lenders to seek his help in creating a new kind of product. Thus, Bill 1340 was drafted to create “small long-term loans”.
The bill was defeated between committees and was the subject of several hearings; in the end, it was recommended for a summer study committee, but not before eliciting a reaction from the community.
Fraser said the Indiana Institute for Working Families was just one organization among a coalition of religious and community leaders who came together to oppose the bill as drafted in the origin.
In the first version, a “small long-term loan” was defined as a loan of $ 2,000 over a one-year term with an APR of 340%. Interest would also be charged on the basis of the initial principal, rather than the remaining principal over the life of the loan.
“So when you add it all up, someone takes a loan of $ 2,000 and pays $ 4,800 in interest,” Fraser said.
After learning more about the implications of interest, Burton said he could not “accept this type of interest rate.”
The committee did not review the original version of the bill, and it was later amended to allow a six-month loan of $ 1,000 with an APR of at least 180%. The second project also failed to get out of the committee.
Fraser and Burton both said the bill passed by the summer study committee would be positive because it would allow for an in-depth discussion on the issue.
Burton said that while he’s not usually a regulator, he wants to make sure consumers using payday lenders are protected.
“Before, they weren’t regulated at all. People were lending money in parking lots, breaking people’s arms, all kinds of crazy stuff, ”he said. “So I argued, as long as the payday lenders are there, let’s make sure we know what they’re doing and consumers are made aware of what they’re getting into and what it’s going to cost them.
“There are people who thought I was trying to lobby for some kind of high interest loan. I have never been in favor of it. I try to make sure these are regulated where consumer safety comes first and the supplier is fair and equitable.
Fraser said she was eagerly awaiting the new federal guidelines for payday loans, but in the meantime, borrowers should look for other options. Some credit unions offer short-term loans with better interest rates than those consumers can find with payday lenders. She said two pilot programs in Lafayette and northeast Indiana are also experimenting with short-term loans for high-risk borrowers at an 18% interest rate. And while Indiana’s payday loan regulations are considered better than other states (no loans are given for vehicle titles as collateral, for example), Fraser said the job was not finished.
“In some ways we’re in a much better position than some other states, but that doesn’t mean Hoosiers shouldn’t expect better consumer protection. It could always be better.