The following circumspect and thoughtful letter to the editor of the Providence Journal lucidly written by Matthew McCabe should be given considerable weight in all 50 states on the reformation and abuses of payday lending! Payday loans rarely work out favorably for the borrower and only lower credit scores and increase debt to unmanageable levels.
The Rhode Island House Finance Committee will hold a hearing on a bill that would place a cap interest rates for payday loans at 36 percent. This bill is supported by the Rhode Island Payday Lending Reform coalition, which includes local nonprofits, religious groups and politicians.
This legislation is vital to protect vulnerable families, and to help Rhode Island stay on the path to economic recovery. This is why the bill has broad support. At a February press conference for the bill, four mayors spoke in support, three of whom are Republicans, demonstrating that this is a bipartisan issue. Seventy percent of the public supports a rate cap of 36 percent or lower.
Payday loans are a way for people who need cash, and who typically don’t have access to traditional banking resources, to get a loan quickly. Usually a borrower will bring in a pay stub and receive a short-term cash loan supposed to be repaid by next payday. Interest rates on these loans are often extraordinarily high. ( it is called usury Matthew)In Rhode Island, the maximum interest rate is 260 percent.
The problem with payday loans is that they frequently become debt traps. The typical payday borrower has nine payday transactions a year. The industry relies on extracting all the money it can from a small group who believe that they have no choice but to turn to payday lending.
A 36 percent cap has precedent, both historical and contemporary. Rhode Island used to cap payday loans at 36 percent, until a special exemption passed in 2001 removed the cap for these lenders. Seventeen states, Washington, D.C., and the military all cap payday loans at or around this amount.
Giving payday lenders a special exemption from the lending laws that govern other banking institutions is unfair and should be outlawed. Healthy communities rely on a healthy system of community banks and credit unions, and this system is hurt by the presence of predatory payday lenders
There are several arguments against a 36 percent cap: Borrowers would have nowhere else to go. They would be forced to turn to unregulated online lenders, and a rate cap would hurt the economy by eliminating payday lending jobs.
These arguments are fallacious. There are several lending alternatives for people without resources, including Capital Good Fund and Navigant Credit Union. These lenders charge lower interest rates, and help borrowers build credit. There are also data that say that borrowers don’t have the desire, or sometimes even the ability, to turn to online forms of payday lending.
A study from the Center for Responsible Lending found that payday lending, even when factoring in employee wages, drains $1.65 million per year from Rhode Island. This is because the main payday lenders in Rhode Island are out-of-state firms. In addition, there is high turnover at payday lending firms, meaning that they are not the kind of employers that Rhode Island needs.(Read what Stephen J. Dubner has to say about payday and title loans. His account of what happened to SEBASTIAN McKAMEY after he had an unfavorable borrowing experience should be proof enough for the discerning reader!!)