by Chris Sanders, KBF Interim Coordinator
"Hurry in to get your holiday cash today!” “Bring extra cash Ho-Ho-Home for the Holidays!” These advertisements for payday loans can be hard to escape during the holidays. After seeing these advertisements, many well-intentioned parents and grandparents will take out a loan in order to purchase gifts for their loved ones. That few hundred dollars will push them into a debt trap that could cost them thousands to escape from.
While its volume increases around the December holidays, payday lending exists year-round. As a faith leader, I am forced to take action when this joyful season is used as temptation to enter into usurious, predatory practices.
Payday lending terms do not immediately appear harmful — a $45 charge to borrow $300 for two weeks. But once two weeks pass, a borrower is left with two choices: Pay the $45 fee which only buys two more weeks to pay the whole lump sum plus another fee, or pay back the entire loan. There is no way to reduce the principal except to pay it in full.
If the borrower walks away, the lender has direct access to their bank account to take the entire amount owed. Often people do pay off the loan, but then they still have to buy gas. And groceries. And pay rent, and guess what? Because of that hole in their budget, they can’t quite make it to the next payday. So borrowers go back to the payday lender for another loan, and another fee on top of that new loan.
Borrowers pay endless fees without reducing what’s owed. It is a pattern of repeated borrowing. It is a vicious cycle of debt that is nearly impossible to break. And it is the most profitable scenario for the lender. But it is financial quicksand for the borrower.
This is not a side effect. It is the payday lending business model. The goal of the industry is for its borrowers to be unable to pay off their “short term loan” for months, years or never at all. In fact, 76 percent of all payday loans are taken out within two weeks of a previous payday loan. A typical national payday loan borrower, with 10 loans in a year, paid $458 in interest alone to borrow $350. That sounds impossibly high, and it is often impossible for borrowers to break this debt cycle.
The Kentucky Baptist Fellowship intends to do something about this, in Washington and in Frankfort. I’ve been preaching on it in our churches. Everywhere I go, people agree that something must be done.
We are working to close the debt trap once and for all.
We’re asking the Kentucky General Assembly to cap payday interest rates at 36 percent.
And we’re asking the Consumer Financial Protection Bureau, the government agency responsible for protecting the customers of banks and lenders, to issue a strong new rule that would require payday lenders to determine a borrower’s ability to repay. Responsible businesses already take borrowers’ financial obligations into account, but payday lenders have proven that they will abuse their customers if given the opportunity.
We believe this will open the door for real competition. Fair competition should create responsible loans that offer borrowers a low-dollar option that will not destroy their financial futures. In the name of the One born in want at Christmas, let us not continue to allow vulnerable people and families to be exploited.
This article originally appeared in the Louisville Courier-Journal.
Join in the KBF Payday Lending Debt Trap Conference & Advocacy Day on Feb 23 & 24! Click here for more info!