Editorial: Payday lending should be restricted

Lawmakers missed a chance to regulate an industry that harms vulnerable Kansans

Claudette Humphrey, director of stabilization services at Catholic Charities of Northern Kansas, urged legislators Wednesday to consider restrictions for payday lenders. (Allison Kite/The Capital-Journal)

The average federal student loan carries an interest rate of around 5 percent. When you take out a loan for a car, you can expect to pay between 3 percent and 10 percent. The average interest rate for a credit card is a little more than 15 percent. But if you get a payday loan in Kansas, you’ll be slapped with an interest rate of 391 percent. Alex Horowitz is a consumer finance researcher with the Pew Charitable Trusts, and he explains just how bad this deal is for borrowers: “So in dollar terms, somebody who borrows $300 and has it out for five months of the year would repay a total of about $750 to borrow that $300.”

 

It isn’t difficult to see how incapacitating this massive burden is for people whose financial situation was desperate enough to require a payday loan in the first place. What’s worse, they often become dependent on the loans – two-thirds of payday borrowers in the U.S. take out seven or more loans per year, and 69 percent use the money to pay for recurring expenses (such as bills, food, gas, etc.). Because they typically have bad credit, this traps them in a cycle of extremely high-interest debt. More than 12 million Americans spend $30 billion every year on payday loans, and many of them either default or take out other loans to cover what they owe.

According to the Pew Charitable Trusts, payday borrowers are disproportionately likely to be low-income African Americans with lower average levels of education. Borrowers are 62 percent more likely to earn less than $40,000 per year, 82 percent more likely to have lower than a four-year degree and 105 percent more likely to be African American.

A special legislative committee recently squandered a chance to recommend restrictions on payday lending in Kansas. It decided not to take action on a bill that would have limited the annual interest rate on payday loans to 36 percent, ensured that borrowers could only have one outstanding loan of $500 or less, and prevented lenders from charging a monthly fee of more than 5 percent of the loan’s principal.

Payday lenders argue that their interest rates are so high because the loans are meant to be short-term. They also say their customers often have limited alternatives when bills are due and necessities must be purchased, some of which are even more costly than a payday loan. Whitney Damron is a lobbyist who represents the Kansas Consumer Financial Services Association (which is comprised of payday lenders), and she says Kansans should be free to take out whatever loans they like: “Consumers of payday loan lenders are qualified to make financial decisions for themselves without government interference.”

While it’s fair to argue that payday lenders are offering a service that many Kansans use, it’s the role of government to determine whether this service is having a net positive or negative effect on the state. Despite payday lenders’ attempt to present their industry as a lifeline for those in need, their business model revolves around charging distressed people an obscene amount of interest to borrow money. This practice often harms the most vulnerable members of our society, which perpetuates inequality and incentivizes irresponsible behavior.

We don’t know exactly how much interest payday lenders should be allowed to charge, but 391 percent is simply outrageous. When an industry has as many social costs as payday lending, it’s the state’s responsibility to figure out a way to mitigate them – a responsibility our lawmakers failed to discharge earlier this week.

Members of The Capital-Journal’s editorial advisory board are Zach Ahrens, Matt Johnson, Ray Beers Jr., Laura Burton, Garry Cushinberry, Mike Hall, Jessica Lucas, Veronica Padilla and John Stauffer.

 

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