Because payday lending is most often utilized by people living paycheck to paycheck, it can easily lead to a lifetime of debt for those forced to borrow at high interest rates. While high rates can be manageable for those that adequately plan ahead, in 2009 it was estimated 76% of payday loans are “churned,” meaning borrowers take out new high interest loans to pay off older loans. As a result, borrowers can easily be trapped in a debt cycle with no way out.
Traditional payday lenders have come under much scrutiny in recent years, and the industry has declined as policymakers have placed greater restrictions on their ability to lend. Fifteen states have banned high cost loans, and many others – including Washington state – have capped the maximum size of loans and frequency of borrowing for individuals, reducing economic harm to low-income borrowers .
But according to Liz Weston on MSN Money, several big banks have found loopholes to evade state laws prohibiting high-rate lending. Even though many states have banned such loans, banks are giving payday lenders access to bank accounts and consequently, access to high-interest borrowing. Wells Fargo, for instance, charges $7.50 per $100 borrowed, which equates to a 274% annual percentage rate on a 10-day loan. Other big banks such as U.S. Bank and Fifth Third Bank charge $10 per $100 borrowed, leading to even higher annual rates.
Obviously, the need for quick cash will not change, and options should be available for those who need it. But short-term loan shouldn’t indebt a borrower for the rest of his or her life.
As an alternative, employers may provide low-cost or free advanced payment options to employees, and many credit unions provide low-cost, low-interest options to those in need. Credit unions often offer rates with an annual percentage that is much lower than banks or traditional payday lenders, and certain nonprofits provide emergency funding for individuals trying to keep themselves and their families afloat.
Thankfully, the FDIC and federal government are looking into big banks’ payday lending practices, and are expected to issue new rules curbing predatory and extralegal behavior. While quick loans are an unavoidable fact of life for many Americans, having to borrow a little bit in order to pay rent or keep the lights on shouldn’t be an invitation to a lifetime of poverty and debt.
By EOI Intern Bill Dow