For a family that’s just barely making ends meet, an unexpected expense — a broken-down car, a busted water heater, emergency medical care, etc. — can force some tough choices. For people without the luxury of borrowing from financially stable family or friends, and for those whose credit histories are less than ideal (or maybe even nonexistent), a payday loan can emerge as the most promising option.
Payday loans are short-term loans that last about the length of a typical pay period (14 days). Essentially, high-risk borrowers use a payday loan as an advance on their next paycheck, and the lender charges a fee for the service.
Numbers show how popular payday lending is in Indiana. According to a Center for Responsible Lending report, Hoosiers borrowed $502.9 million in payday loans and paid $70.6 million in related finance charges in 2013. In Marion County, there are 92 payday loan storefronts, more than the number of McDonald’s and Starbucks stores combined (71).
Jessica Fraser, program manager for the Indiana Institute for Working Families, said although payday lenders provide a needed service to people who otherwise might be shut out of financial institutions, they’re not without drawbacks.
One major concern is the possibility of a borrower becoming stuck in a debt trap — a cycle of paying off then reborrowing payday loans, racking up finance charges along the way.
Another major concern: High interest rates.
“We know companies need to be profitable; we know folks need access to credit. But there’s got to be a way to do it without having such high rates, a way for them to make a profit and for folks to not be taken advantage of,” Fraser said.
According to a report from Fraser’s organization, Indiana law doesn’t limit the annual percentage rate (APR) that can accompany a payday loan, but “the finance charges essentially cap APR at approximately 391 percent.”
“Thirty-six percent APR is the most we’ll be able to support in good conscience,” Fraser said of the Indiana Institute for Working Families.
Fraser said Indiana also limits payday loan principal and finance charges to 20 percent of a borrower’s income, but research indicates low-income borrowers can only pay up to 5 percent of their income on these loans while still being able to cover living expenses and avoid reborrowing from the lender.
So-called cooling off periods — the required amount of time a borrower must wait before borrowing again — are another contentious area of payday lending. Fraser said the institute will be studying cooling off periods over the summer to identify a best practice, but across the country those periods range from 24 hours to 45 days.
These concerns and more, including the fact that payday lenders are clustered in impoverished areas and sometimes considered to be taking advantage of borrowers’ neediness, are why the federal Consumer Financial Protection Bureau is expected to release new regulations regarding payday lending. Fraser said there is a lot of speculation about the new guidelines, but no clear information yet on what the rules might entail.
But Indiana Rep. Woody Burton, R–Whiteland, said the news circulating about the new potential regulations prompted payday lenders to seek his help creating a new type of product. Thus, House Bill 1340 was written to create “long term small loans.”
The bill was bounced among committees and had multiple hearings; ultimately, it was recommended for a summer study committee, but not before arousing some community backlash.
Fraser said the Indiana Institute for Working Families was just one organization among a coalition of faith leaders and community leaders that banded together to oppose the bill as it was originally written.
In the first draft, a “long term small loan” was defined as a $2,000 loan over a year term with 340 percent APR. The interest would also be charged based on the original principal, rather than the remaining principal over the life of the loan.
“So when you added it all together, somebody would take out a $2,000 loan and pay $4,800 in interest,” Fraser said.
After learning more about the interest implications, Burton said, he couldn’t “go along with that kind of interest rate.”
The committee didn’t entertain the original version of the bill, and it was later amended to allow a $1,000 loan over six months with an APR of at least 180 percent. The second draft also failed to make it out of committee.
Fraser and Burton both said the bill getting picked up by the summer study committee would be a positive, because it’d allow for an in-depth discussion about the issue.
Burton said even though he is typically not a regulation person, he wants to be sure consumers using payday lenders are protected.
“They used to be totally unregulated. People were loaning money out in parking lots, breaking people’s arms, all kinds of crazy stuff,” he said. “So I’ve been an advocate for, as long as payday lenders are there, let’s make sure we know what they’re doing, and consumers are made aware what they’re getting into and what it’s going to cost them.
“There are people who thought I was trying to push for some kind of high interest rate loan. I’ve never been in favor of that. I’m trying to make sure these are regulated to where the safety of the consumer is first, and the provider is being fair and equitable.”
Fraser said she looks forward to the new federal guidelines for payday lending, but in the meantime, borrowers should look for other options. Some credit unions offer short-term loans with better interest rates than what consumers can find at payday lenders. She said two pilot programs in Lafayette and in northeast Indiana are also experimenting with short-term loans for high-risk borrowers at 18 percent interest. And although Indiana’s payday loan regulations are considered better than those of other states (no loans are given for vehicle titles as collateral, for example), Fraser said the work is not done.
“In some ways, we are in a much better position than some other states, but that doesn’t mean Hoosiers shouldn’t expect better consumer protection. It could always be better.”