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A invoice to limit payday loans that the Times editorial board defended on Monday died before a state Senate committee on Wednesday, after several lawmakers said they feared the bill would deprive busy consumers of an available source of money.
What am I saying, really?
The measure, SB 515, sought to do three things. First, it would have prohibited lenders from granting more than six payday loans to a person per year. To enforce this restriction, the State would have had to set up a database (at the expense of the lenders) listing the payday loans granted. Second, it would have doubled the minimum time for a borrower to repay a loan, from 15 days to 30. And third, it would have required lenders to offer borrowers who cannot repay their loans on time the option to repay them. in installments over a few months.
Payday lenders have argued that the new rules would have put them out of business, leaving consumers at the mercy of less regulated online outlets. If true, it implies that the livelihoods of the industry depend on customers taking out seven or more loans a year, or those who bounce checks to the lender and therefore may be charged more fees while they struggle to repay their loans.
It turns out that the State Department of corporations reports that the average personal loan customer took out between seven and eight loans in 2011, the last year studied. And 7.5% of post-dated checks given to lenders that year bounced, although lenders were able to recover more than two-thirds of the money owed to them.
So clearly the industry is making a lot of money with people living so close to the financial limit that they need repeated cash injections, or can’t pay back what they borrow quickly. This goes against the industry claim that payday loans are for people who are suddenly hit with a big bill they weren’t expecting – for example, a cracked tooth or a breakdown. car – and who just need temporary help.
The policy question is whether these borrowers should be able to take out high-cost loan after high-cost loan, or whether they should have a better alternative. Critics of payday companies, including the Center for Responsible Lending, say the loans can become a debt trap for people who live paycheck to paycheck. They ask, legitimately, how someone who didn’t have enough money on their last check to cover $255 of expenses could find an extra $300 on their next check to pay off the payday loan. Most likely, that person would have to take out another payday loan soon after to fill the gap left by the last one. This is how a person goes from one loan to seven or more.
Paul Leonard, state director of the Center for Responsible Lending, noted that the legislature has cut subsidies for workplace welfare, health insurance for low-income people and other safety net programs these last years. It’s ironic, he said, that the only empathy lawmakers show for these families is when groups like his threaten to limit access to “super high-cost debt products.”
Payday companies also complain that they are already heavily regulated, but that’s only true if you ignore how much state and federal governments scrutinize more conventional lenders. Governments impose many rules on lenders to protect consumers not only from being misled, but also from being taken advantage of when they are in dire straits. SB 515 may not have been perfect legislation, but it was consistent with what the government is trying to do in the financial industry.
Nevertheless, if industry critics were to again try to prevent payday lenders from profiting from the financial difficulties of low-income borrowers, they should be looking for ways to make more appropriate forms of credit available. As “juanq40” player Noted in response to the Times editorial, consumers generally cannot obtain installment loans for amounts less than $2,500. The state has tried pilot projects with small installment loans, but the business has yet to gain traction.
Perhaps those who would like to limit the number of payday loans per consumer could combine this proposal with a new initiative on small installment loans. That way, at least they would have an answer when lawmakers say they fear cutting off their less fortunate constituents after half a dozen payday loans.
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Follow Jon Healey on Twitter @jcahealey
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