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Wednesday, August 17, 2022

Payday loans: Relief or bondage?

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More than 35 percent of Indiana residents say they have either used a payday loan, or know someone who has, according to a recent survey by Bellwether Research.  

National and state leaders are currently debating about what types of loans consumers should be able to borrow and limits on how much interest can be charged. 

Consumer advocates and community organizations, including some that are predominantly African American, say protections must be put in place to make sure Indiana families are not trapped by high interest loans. 

These loans include those that are given at local stores and those provided online. 

“Statistically, high interest loans have higher rates of default and result in bad credit ratings,” said Erin Macey, a policy analyst for the Indiana Institute for Working Families, a consumer advocacy organization that released the survey about payday loans.

This week, the SAFE Lending Act was introduced in Congress as an effort to offer new protections for consumers against high-risk online lenders. Co-sponsors of the bill include well-known members of the Congressional Black Caucus such as Sen. Cory Booker, Sen. Kamala Harris and Rep. Elijah Cummings, who helped introduce it. 

Under the bill, lenders would be required to comply with state lending laws, lenders would not be able to use borrowers’ bank account information to automatically withdraw funds, overdraft fees on prepaid cards would be banned and lenders would be prohibited from selling borrower information to third party vendors. 

Stop the Debt Trap, a coalition of civil rights, consumer, labor, faith, veterans and senior community organizations has announced its support of the bill. 

“For too long, payday lenders have exploited loopholes in federal law to make the biggest profit possible on the backs of unknowing consumers,” the coalition wrote in a statement.

Last month, the Indiana House of Representatives narrowly passed House Bill 1319, a bill that would expand the amount of money borrowers could get, but it would also sharply increase the interest they would have to pay. 

All Democrats and 13 Republicans in the House opposed the bill, which was introduced by a group of Republicans led by State Rep. Martin Carbaugh. 

Another Republican, State Sen. Greg Walker, presented a bipartisan proposal, Senate Bill 325, which would have capped payday loans at 36 percent. That bill died in committee, which made House Bill 1319 even more important. 

Payday loans are loans in which the lender takes payments directly from the borrower’s bank account on the borrower’s payday, unless they make the payment in a store. Payday loans can be given in cash directly or online and deposited into the borrower’s bake account.

According to HB 1319, the state limit on interest rates would rise from 72 percent APR to 222 percent APR. Under current law, a borrower who makes $16,000 a year would be eligible for a two-week loan of $266 and would pay $400 in fees if they take 8-10 loans in a row. 

Under the new bill, those same borrowers would qualify for a one-year loan of $1500 and pay nearly $1600 in fines. 

This is important because the majority of borrowers are not able to pay back the loans without replacing them with new loans, leading to a cycle that is difficult for consumers to end. More than 75 percent of revenue lenders receive is from borrows who take out more than 10 loans a year, according to the Consumer Financial Protection Bureau (CFPB), an agency that determines lending practices.

A bill in the Indiana Senate, SB 416, is similar to HB 1319 but has been turned into a study, which will give lawmakers and advocacy organizations more time to discuss payday loans and fees before the next legsialtion session. 

Supporters of the increased loans and interest rates in HB 1319 include well-known lenders with Indianapolis locations such as Advance America, Check into Cash as well as trade associations such as the Community Financial Services Association of America (CFSA). 

They believe attempts to limit borrowing and interest rates interfere with private enterprise and the choices of consumers. No one, they note, forces borrowers to take out loans and borrowers are made fully aware of fees when they sign loan agreements. 

Supporters of payday loans believe that they provide a helpful source of credit in financial emergencies, and that significantly reducing the cost of payday loans could cause lenders to go out of business, and leave working people who have poor credit with no good options. 

“Millions of American consumers use small-dollar loans to manage budget shortfalls or unexpected expenses,” said Dennis Shaul, CEO of CFSA. “The CFPB’s misguided rules will only serve to cut off their access to vital credit when they need it the most.”

However, consumer advocates say protections are needed for borrowers because payday loans are a form of predatory lending that is too high and intentionally causes people to trapped in a cycle of debt.  

Of those who participated in the Bellwether survey, a whopping 87 percent said they viewed payday loans more as a financial burden than as financial relief. 

The Indiana Coalition for Working Families is concerned about the impact of both payday loans and car title loans, in which a lender takes access to a borrower’s car title as collateral and can threaten repossession of the car as coercion for payment. 

“Calling these loans credit building products is adding insult to injury,” Macey said. “These products will do extreme damage in a state with a bankruptcy rate that is already the seventh worst in the country.”  

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