While churning cream leads to a nice treat, the same cannot be said for payday loans. In fact, “churning” payday loans can lead borrowers to financial despair – and payday lending companies to great wealth.
A 2009 study by the Center for Responsible Lending estimated that 76% of payday loans are “churned” – meaning borrowers repeatedly take out payday loans to pay off previous loans. Payday loan companies understand and embrace this, as fees from churned loans total $3.5 billion annually.
According to the report, some lenders also offer free or highly-discounted rates “in order to attract new customers and convert them into long-term borrowers.” As a result, many borrowers get caught in a payday loan debt cycle that can lead to financial ruin. But in Washington state, the sun is setting on this lucrative and predatory industry.
A recent report on payday lending in 2011 by the Washington State Department of Financial Institutions contains good news for consumer advocates: the payday lending industry has shrunk in our state for the second straight year. In fact, the industry contracted to nearly a quarter of the size it was in 2009.
This downsizing is largely the result of HB 1709. HB 1709, which passed in 2009 after enormous debate between business and consumer advocates, limited the size of loans given out to a maximum of $700 and set a maximum number of times an individual could take out a loan over the course of the year – eight.
Looking at the numbers, the law has had its intended effect: paring back the often-predatory payday loan industry. Only 855,829 loans were made in 2011 totaling $327 million, down from almost 1.1 million loans for a total of $434 million in 2010, and 3.25 million loans for a total of $1.336 billion in 2009.
In addition to reducing the number of loans made, the 2009 reform also guaranteed further protections for borrowers. One example is in changes to payment plans. Before the law went into effect, consumers could only enter a payment plan with a lender after four successive loans with the same company.
However, after the law went into effect on January 1st, 2010, borrowers had the right to a payment plan whenever they chose, and could not be charged a fee. Reforming payment plans allowed borrowers to pay back loans with greater ease, and made it easier for high-frequency borrowers to avoid “churning” – taking out additional high-interest loans to pay off others.
The overall decrease in predatory lending is a major victory for consumers. According to a 2012 Pew report on payday lending, 12 million Americans use these loans annually, and on average a borrower will take out eight $375 loans per year, spending $520 on interest payments. The report also notes that the average borrower is in payday loan debt for five months per year. By bringing consumer-focused standards to the payday loan industry, Washington legislators won a victory for consumers and common sense.
By EOI Intern Bill Dow