The Loan Shark Protection Act would limit the interest charged on credit cards to 15%. A ceiling of 15% would be too low, naively too low. Too bad the bill’s sponsors, Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez, weren’t more careful, as their clumsy approach gives ammunition to the enemies of those who limit forms of consumer credit really. abusive, the most obscene example being payday. to lend.
As the name suggests, a payday loan is a quick injection of money to help the borrower until the next paycheck arrives, when it is paid off. But that’s not what usually happens. Here is the usual scenario:
Joe takes out a $ 300 payday loan to be paid off in two weeks. He would be billed something like $ 45 in fees and interest. This comes down to an APR (average percentage rate) of 391%. Rather high borrowing costs, but it’s for an emergency, right?
But more than 75% of borrowers do not repay right away. They usually turn the loan into 10 loans per year. Each loan is not a new $ 300 loan. He renews the same loan of $ 300 nine times, each time adding these high fees and interest. Joe’s costs keep piling up and he finds himself trapped in debt. The debt trap is the business model of the payday loan.
The rates and fees for payday loans vary from state to state, with some allowing for astronomical borrowing costs. A typical payday loan in Texas carries an APR of 661%! In Nevada, Idaho and Utah it is 652%
Why do people take out such loans? Because they don’t know what they’re getting into. Payday loan showcases market their wares as “quick” or “easy” money to use in an emergency. Some attract customers to the net by giving them the first free loan at zero% interest.
The ideal client for a payday loan is a trusted low-income worker who is not sophisticated about personal debt. It is important to note that the borrower has a reliable income stream to tap into. The money could come from a job or three, or a disability or unemployment check. (Payday lenders love military personnel. And they always require borrowers to have bank accounts.)
A recent Wall Street Journal editorial attempted to link the ill-fated Loan Shark Protection Act to independent critiques of payday loan abuse. He hailed payday loans as a welcome alternative to loan sharks and organized crime.
“The availability of legal loans is what helped put Louie Legbreaker into bankruptcy,” the editorial said.
In fact, the usurious loan business is alive and well, only Wall Street is running it now. Private investors include payday loan companies in their portfolios. The desperate people who borrowed from Louie Legbreaker at least knew who they were dealing with.
“Price caps on any good or service inevitably reduce supply,” the editorial says piously. You might think that credit is a basic human right that cannot be denied. In fact, there are people that even today’s payday lenders won’t care with – those who have neither assets nor income.
Either way, reducing the supply of debt traps that its victims described as “soul crush” and “living hell” wouldn’t be a bad thing. This industry thrives on people trying to survive on a typical income of just $ 25,000, for heaven’s sake.
Of course, the impoverishment of much of our low-skilled workforce cannot help the economy, let alone the human cost. Face it, payday loans and the politicians who protect them are a bane to America’s morals. Honestly, I don’t know how some people sleep at night.
Follow Froma Harrop on Twitter @FromaHarrop. She can be reached at [email protected]