The Loan Shark Protection Act would limit the interest charged on credit cards to 15 percent. A 15 percent cap would be too low — naively too low. Too bad the bill’s sponsors, Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez, weren’t more careful, because their clumsy approach hands ammo to foes of those reining in truly abusive forms of consumer credit, the most obscene example being the payday loan.
As the name implies, a payday loan is a quick infusion of cash to tide the borrower over until the next paycheck arrives, when it’s paid off. But that’s not what usually happens. Here’s the usual scenario:
Joe takes out a $300 payday loan to be paid back in two weeks. He’d be charged something like $45 in fees and interest. That comes to an APR (average percentage rate) of 391 percent. Pretty high borrowing costs, but it’s for an emergency, right?
But more than 75 percent of borrowers don’t pay it right back. They typically turn the loan into 10 loans a year. Each loan is not a new $300 credit. It’s cycling the same $300 loan nine times, every time adding these high fees and interest. So Joe’s costs keep piling up, and he finds himself stuck in a debt trap. The debt trap is the payday loan’s business model.
Payday loan rates and fees vary from state to state, with some allowing astronomical borrowing costs. A typical payday loan in Texas carries an APR of 661 percent! In Nevada, Idaho and Utah, it is 652 percent.
Why do people take out such loans? Because they don’t know what they’re getting into. The payday loan storefronts market their wares as “quick” or “easy” money to be used in emergencies. Some lure customers into the net by giving them the first loan free at zero percent interest.
The ideal payday loan customer is a trusting member of the working poor who is not sophisticated about personal debt. Importantly, the borrower has a dependable trickle of income to tap. The money could come from a job or three, or a disability or unemployment check. (Payday lenders are fond of military personnel. And they always demand that borrowers have a bank account.)
A recent Wall Street Journal editorial tried to tie the unfortunate Loan Shark Protection Act to unrelated criticism of payday loan abuses. It praised payday loans as a welcome alternative to loan sharks and organized crime.
“The availability of legal loans is what helped to put Louie Legbreaker out of business,” the editorial said.
Actually, the loan-sharking business is alive and well, only Wall Street now runs it. Private equity investors include payday lending companies in their portfolios. The desperate folks borrowing from Louie Legbreaker at least knew who they were dealing with.
“Price ceilings on any good or service inevitably reduce supply,” the editorial piously states. You’d think that credit is a basic human right that cannot be denied. In fact, there are people even today’s payday lenders won’t bother with — those without assets or income.
In any case, curtailing the supply of debt traps that its victims have described as “soul crushing” and “a living hell” would not be a bad thing. This industry preys on individuals trying to survive on a typical income of only $25,000, for heaven’s sake.
Of course, pauperizing a large portion of our low-skilled workforce can’t be helping the economy, never mind the human cost. Face it, payday lending, and the politicians who protect it, are a blight on America’s moral standing. Honestly, I don’t know how some people sleep at night.