Responsible Lending; Responsible Borrowing

What do people do when they need money quickly? Their car needs costly repairs so they can get to work. A medical emergency has resulted in a hefty bill. The furnace is broken, and the temperature is dropping.

Many Mainers turn to payday lenders for fast loans. But while they’re easy and fast to obtain, payday loans come at a high price—with interest rates topping 200% and many lenders demanding repayment from the borrower’s very next paycheck. What do borrowers do when they can’t repay their loan; when their wages are insufficient or other expenses prevent them from paying off the loan? The answer is: they take out more loans and, in turn, accrue more debt, and find themselves in a relentless cycle of borrowing and re-borrowing.

Predatory payday lending is the catalyst for this debt trap, and it’s time for greater regulation.

Payday lending exploits people already struggling, siphoning money families need for food, gas, rent, utilities, and other basics and often leads to a cascade of other financial consequences:  hefty overdraft fees, delinquency on other bills, involuntary loss of bank accounts, and even bankruptcy.

With one in three working Maine families (data file) at or near poverty and 50 percent of Mainers having difficulty paying bills, payday lenders tout their convenience and access to credit that those low-income borrowers could not normally obtain.

Easy access does not make a loan affordable. Without assessing the consumer’s ability to repay the loan and imposing usurious fees and interest rates, payday lenders design their loans to extract as many fees as possible. According to a study by the Center for Responsible Lending (CRL), payday lending establishments issue loans that cost the American economy $8 billion in interest and fees annually. In Maine, these loan sharks assess over half a million dollars in payday fees on Mainers every year.

Consumers have other options. A new guide from the Maine Bureau of Consumer Credit Protection suggests that overdraft protection lines of credit from any Maine bank or credit union offer a safe and consumer-friendly alternative to payday loans. These lines of credit have annual percentage rates anywhere between 9.9 and 18 percent, making repayment more affordable.

CRL found that in states that restrict payday lending, consumers turned to a host of other financial options including many non-debt alternatives. This not only relieves them of unending debt, some consumers are able to put money away in savings. A survey of enlisted service members found that only 12% would be inconvenienced without this access to payday loans. Colorado, which focused on forcing payday lenders to provide loans that borrowers can afford, did not hinder people’s ability to get loans quickly, but did reduce risk and debt as Coloradoans spent roughly 42 percent less annually on payday loans.

Regulation works. By requiring lenders to make only loans borrowers can pay back, we can stop the endless cycle of debt and re-borrowing that burdens too many Mainers. If people can get a bad loan fast, they deserve reform even quicker.