Note to Lawmakers: If Payday Loans Were Cars, They Would Be Recalled

by: TheBell

Mon Feb 22, 2010 at 14:45:58 PM MST

By asking the question, they must be concerned about people like Toby Serrano, a master mechanic from Denver who took out a $400 payday loan to get his gas turned back on. Except Toby found out he could not pay the loan back when it was due two weeks later and ended up rolling it over or refinancing it for five months -- at a cost of $720 in fees.  

Or maybe they are worried about Katie Oliver, who took out a $400 payday loan to cover the cost of clothing for her grandchildren. She couldn't pay it back when it was due, so she refinanced it and refinanced it for eight months. She ended up taking out new payday loans to pay off other payday loans. She could never get caught up and is now receiving food stamps and filing for bankruptcy.  

Maybe they want to ensure access to payday debt for people like Portia Barnes, who took out a $480 payday loan for a security deposit on a new apartment after her boyfriend kicked in the door of her old one and then skipped out on the rent.  Portia could not pay her loan back when due and spent a year refinancing it every two weeks, at $75 a pop.

If you think these are isolated cases, think again. Two-thirds of all the payday loans issued in 2008 were either rollover or refinanced loans. This means two out of every three borrowers could not pay off their loans when due. What would happen if two-thirds of some other consumer product, say toasters (or heck, even Toyotas), did not work as designed. Of course people demand action?

Consumer credit counselors in Colorado reported in a 2009 survey that payday loans financially harmed clients who used them. Moreover, 75 percent of the counselors said payday loans were very harmful to their clients' ability to pay their mortgage or rent, and 73 percent said they would never recommend a client take out a payday loan.

Credit counselors aren't the only ones who see the harm caused by these loans. Social service agencies that help low-income people throughout Colorado are witnesses, too. Eight out of ten service providers reported that payday loans were very harmful to their clients' ability to pay their mortgage or rent in a 2009 survey. Sixty-seven percent reported it takes more than six months for clients to pay off one loan.

Clearly, these expensive, predatory loans cause a significant amount of harm to Colorado borrowers. The best way to help these borrowers -- the ones lawmakers are so concerned about -- is to end the special exemptions for payday loans and bring them under the state's 36 percent usury cap.

In states that have removed the special exemptions for payday loans, credit unions and banks and other lenders have stepped up with short-term loans at reasonable rates. While some of these products exist in Colorado, they get pushed out by the prevalence of payday loans.