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Quick Cash, Quicksand Part 3: A Solution?

Despite cities like San Francisco and Oakland’s attempts to halt payday lenders’ proliferation through zoning measures, many consumer advocates say there’s only one way to truly protect consumers from the astronomical annualized percentage rates associated with payday loans: an interest rate cap.

“If companies are still allowed to make triple-digit interest loans, that’s not protecting consumers from usury,” said Liana Molina, the Payday Campaign organizer at the California Reinvestment Coalition.

The California Finance Lenders law limits the amount of interest lenders can charge for small loans to 28%. In the 1990s, check cashers successfully pushed for legislation that exempted them from the interest rate caps that other lenders must abide by. In California, payday loan fees, calculated as an annual percentage rate, exceed 400 percent.

In contrast, interest rates for credit card cash advances – which are considered expensive — usually run from 20 to 30 percent.

“If people, when they go to buy a car or a house were to get an interest rate of, say, 40 percent, there would probably be protests in the street. And here we have some of the neediest people in the city, paying over 400 percent, and these companies are getting away with it,” said Ivan Barriga, outreach and financial education director at Mission SF Federal Credit Union, one of the few financial institutions in the city to offer a lower-cost payday loan alternative (see sidebar.)

Payday lenders argue that they should be exempt from the Finance Lenders Law because the credit they extend isn’t really a loan, but a deferred deposit. When a payday loan customer gets a cash advance, they give the lender a check, made out for the entire amount of the loan plus fees.

In California, those fees can’t exceed $15 per $100 borrowed. State law also limits the maximum loan to $255, which costs $300 with fees.

When the loan comes due, usually on the borrower’s next payday, they can either let the lender deposit the check, go into the loan store and pay the loan off in cash, or roll the loan over – reborrow the amount owed — which racks up more fees.

Fourteen states either outright prohibit payday lending or have capped the interest rates payday lenders can charge at or around 36 percent.

Payday lenders have largely pulled out of states with low interest rate caps, said Molina.

Jeff Kursman, Director of Public Relations for the payday loan company Check’n’Go said such caps destroy the industry. When Ohio passed a 28 percent rate cap on payday loans last year, the company had 72 stores in the state. Now that number has dwindled to 28, he said.

Since 2007, federal law has prohibited payday lenders from charging members of the Armed Forces rates of higher than 36 percent. The law came about because many soldiers were indebted to payday lenders deeply enough that it complicated their deployment.

Molina says she hopes the same protection will be extended to all consumers, “If a 36 percent rate cap is good enough for our troops, it should be good enough for all Americans,” she said.

This is the third and final installment of Quick Cash, Quicksand, a series about payday lenders and check cashers in the Mission. Click here to read the first story. And here to read the second.

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Bridget writes about community groups, non-profits and collectives for Mission Loc@l.

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  1. Credit Card advances are NOT 20% to 30%. You need to compare apples to apples instead of jumping on the payday lender hate bandwagon.

    Credit card cash advances come with a hefty 4% charge for a cash advance. What if you pay off your loan in two weeks? Well, the interest rate is only 104%. How about in thirty days? Try 48%.

    A late fee of $39 is charged by one credit card issuer on a balance over $250. If you paid off your balance the next day the interest rate calculates to 5,694%

    Fortunately, I have never had to use a payday lender and I don’t carry credit card balances.

    Unfortunately, I stumbled on this article while researching REAL loan-sharks that put small business owners in jail for not paying back 500% loans.

    You might want to read this post and investigate billion dollar corporations that have the Department of Corporations bought and paid for…

  2. Although an interest rate cap does seem like the best way to “truly protect consumers from the astronomical annualized percentage rates associated with payday loans,” an annual interest rate cap of 36% would result in the elimination of an affordable credit choice for consumers.

    At a 36% APR, the total fee charged on a $100, two-week advance would be $1.38. Payday advance lenders could not cover the cost of originating a loan, let alone meeting employee payroll and benefits and other fixed business expenses.

    The real-world examples are proof of the consequences of overly restrictive annual rate caps. Hundreds of stores have closed, thousands of employees have lost their jobs and hundreds of thousands of consumers are left to choose among less desirable credit options.