End high interest pay day loans
A United Methodist bishop testifies on the scandal of predatory lenders who often charge as much as 400% interest. Bishop Minerva Carcaño called for a cap on the amount of interest that can be charged.
When she became ill, a widow living on $500 a month couldn’t pay her medical bills and still meet her basic cost of living. She didn’t want to be a burden to her children so she got a "payday loan," thinking when she was well enough she could earn some extra money by sewing clothes or making tamales to sell.She never got well. The stress of the illness and the worry of a loan that kept spiraling out of control cost the widow her home, her independence and eventually her mental well being.
United Methodist Bishop Minerva Carcaño wanted congressional lawmakers to hear that story and others of people she knows who have been victims of "unscrupulous, predatory payday lenders.
The bishop spoke at a June 4 hearing to brief lawmakers on why all families should be covered by a 36 percent rate cap on consumer loans. Payday lenders charge as much as 400 percent interest on loans that usually average $500. For a $500 loan at 36 percent, fees are $180 over one year; at 391 percent, fees are $1,955 over one year.
Read more here.
According to a Federal Reserve Board of New York study by Donald Morgan, payday loans, which cost $15 per $100 of cash advanced, actually cost less than utility restart fees or bounced checks. This is why consumers choose payday loans, they cost less than the alternatives. Moreover, if a consumer fails to pay a payday loan, the only repercussion is simply an inability to get another payday loan. By contrast, if the widow in the story had incurred a bounced check, or had to re-start her utilities, she would have paid considerably more than she did for the payday loan, and her credit report would list these payment problems. Unlike bounced checks and expensive bank bounce "protection" fees, unpaid payday loans do not impact a consumer's credit report.
Capping the payday loan fee at 36% sounds like a great way to make a helpful resource (cash) cost less. This idea actually sounds great in any realm. The widow's health care costs created this mess, we could also cap the cost of health care. Unfortunately, price caps don't result in cheaper services, instead the services simply become unavailable.
Price caps on payday loans have not resulted in cheaper payday loans. Instead, price caps at such rate have resulted in complete elimination of this less expensive alternative in Georgia and Oregon.
These incidents where some consumers cannot pay their medical bills are indeed sad, but blaming the payday loan for not curing a pre-existing financial problem is a fallacious argument.
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June 9, 2009 9:49 AM