We now have 8 payday lenders in our little town of 30,000.
Loan sharking is illegal, but loan shark lobbyists, apparently, aren't as effective at manipulating legislation.
Sharks found in city
If you loan money, at usurious rates, to people down on their luck who can’t pay it back, which forces them to take out yet another loan to cover the first one and, thus, leap headfirst into a death spiral of debt – and you do it illegally – you’re called a loan shark. If you do it legally, you’re called a payday lender. It’s time to see payday lenders for what they really are.
The Payday Loan industry says they’re only performing a service for people down on their luck. The rules governing these transactions are clearly posted and the industry claims that everyone who takes out one of these loans understands exactly much interest they’re paying.
It works like this: let’s say you get strapped for cash a week before payday. You can walk into a local storefront and get a loan for the amount of your next paycheck. Sounds handy, right? Sure. Let’s say your paycheck is for $350. You go down to the payday lender with a postdated personal check. You fill in some paperwork, pay a fee of (on average) $60, and walk out with $290. So far so good. $60 is a big chunk of your paycheck, but of you need the cash you’re willing to take the hit.
In a perfect world you'd get your real paycheck a week later and pay off the loan.
The industry makes it’s big money by betting on imperfection.
What typically happens next? People run out of money before their next check comes in so they need to take out another payday loan -- in which case they’re now trapped paying $60 every couple of weeks to float what is, in effect, a perpetual advance. Worse yet, let’s say they need some of their real paycheck for rent or food. The check given to the payday lender now bounces: bad for the borrower but great for the lender. The lender now charges you a late fee. To avoid defaulting, the borrower takes out another loan and pays another $60 fee. And so on.
The Center for Responsible Lending calls this “the debt trap” of payday lending.
Payday lenders say publicly that they provide short term loans to help people get over short term financial difficulties, but the unspoken reality is that 90 percent of their profit comes from lenders trapped in long term debt – and at rates that would make real loan sharks blush.
But why on earth would anyone get into this situation? The easy explanation would be something out of 1950’s detective movie: gambling or drugs. The truth is that most payday borrowers are usually folks at the bottom of the income ladder: the working poor and those on social security-- people living close to the edge who are desperate enough to try anything. According to Wisconsin’s Department of Financial Institutions, that desperation usually ends up costing borrowers, on average, an annual percentage rate of 542.2%.
Once there’s blood in the water, more sharks always start circling. In 1995, there were two payday lenders in Wisconsin. By August 2009, there were over 500 -- 64% of which, by the way, are owned by out of state interests. West Bend, population 30,000, now has eight.
Payday lending is being opposed across the country by groups including Wisconsinites for Responsible Lending, the Consumer Federation of America, the National Consumer Law Center, and the Center for Responsible Lending. Closer to home Rep. Gordon Hintz (D-Oshkosh) has a bill to limit interest rates to 36 percent. He’s even drawn support from across the political spectrum, from Lena Taylor to our own Glenn Grothman. But it’s an up hill battle: the Wisconsin Democracy Campaign projects that the payday loan industry is spending as much as $500,000 on over two dozen lobbyists to stop this bill. The WDC reports that the payday loan industry gave a record $140,200 to the governor and to legislative candidates in 2008.
Greed is an equal opportunity employer: six of the top seven campaign contribution recipients were Democrats. I guess we’ll find out how many votes payday loan money can buy.
John C. Bersia in his 2000 Pulitzer Prize winning editorial, coined the phrase “legal loan sharks” to describe payday lenders. Calling payday lenders “legal loan sharks” is an obvious comparison, but it does a disservice to real loan sharks. Real loan sharks only charge, on average, 150%. More importantly, real loan sharks are often willing to negotiate about repayment. Not so with the legal variety.
Eleven states have already begun to reel in these predators. Its’ time for Wisconsin to join them.
ps. This is a typo-free version of the column that appeared in the paper. Grading finals has a price.