A small loan to get a person through to the next paycheck may seem like a blessing, but, in the case of the myriad payday lending shops that dot the Minnesota business landscape and the desperate people who use them, it’s more like a curse.
Current Minnesota law allows a typical $380 two-week payday loan to cost as much as $40. On the surface, it doesn’t seem like such a bad deal - until you add it up and realize that $40 charge translates to a 273 percent annual percentage rate (APR).
By the end of only 20 weeks at that kind of rate, a borrower would pay back more than he or she initially borrowed.
Can anyone say loan shark?
Of course, that’s not how payday loans work by definition. Rather, payday loans are small-dollar, high interest loans requiring payback on the borrower’s next payday. Such businesses don’t need to break anyone’s kneecap to get their money back - they’re first in line for the borrower’s money, thanks to direct debit.
And really, if the loan were a one-time, emergency loan, it wouldn’t be such a bad thing. But what happens more often, according to Brian Rusche, executive director of Minnesota’s Joint Religious Legislative Coalition (JRLC), is that borrowers end up in a cycle of debt that they can’t get out of. Borrow money, pay fee, loan gets paid back after the next paycheck. Because the loan and the fee were taken out of the account, the borrower is now short the same amount of money, plus the fee. So he takes out another loan.
Good for that small business, not so good for families.
According to Rushe and the JRLC, the average Minnesota borrower takes out 10 loans in a year and 20 percent take out 20 or more loans per year. Generally, these loans are made with little or no regard for a borrower’s ability to repay the loan.
“We feel it’s a predatory lending product,” said Rushe, explaining that the JRLC is an interfaith (including Jews, Catholics, Protestants and Muslims) non-profit organization that lobbies the Legislature on pressing social justice issues in the state. “These loans are marketed as short-term small-amount access to credit, but in reality people are trapped. When you pay these kinds of fees, it just makes the monthly bills that much harder to meet.”
Jesus, and Pope Francis more recently, called it usury.
“When a family doesn’t have enough to eat because it has to pay off loans to usurers,” the Pope said in St. Peter’s Square this past January, “this isn’t Christian!”
He’s right. While all lending isn’t a bad thing - almost no one would own a home without a loan - high interest loans that target poor or desperate people are morally wrong.
“This is a loan that makes you worse off,” Rusche said.
JRLC’s efforts at the legislative level to better regulate payday lending in Minnesota should be commended.
If passed, according to Rusche, such a law would require lenders to do some underwriting before making the loan, basically to assess in greater depth whether or not the borrower will be able to pay back the loan without needing to borrow more money. It would also limit the number of loans a payday lender can make to the same person in a year to four. It would close the current Industrial Loan and Thrift loophole that some companies use to get around that law and charge higher fees/interest rates, sometimes as high as 300 to 400 percent APR. If passed, the law would also help protect active military personnel and their families - who are already protected by the federal Military Lending Act, which caps their payday loan interest rate at 36 percent APR - by requiring the Minnesota lenders inquire whether the borrower is an active service member or family member.
Such legislation would not automatically shut down payday lenders, such as S&P in Cloquet or Payday America in Duluth, but it would hopefully cut into the amount of repeat business they get.
We’d like to suggest one addition to the bill: require payday lenders to wrap their loans inside a sheet listing local sources for free or affordable financial counseling.