Monday, April 10, 2006

A place in Hell for payday loan sharks

A weekend story on payday loans made them sound like a ripoff, but really understated how bad the interest rates are:

The prospect of regulating Wisconsin's growing payday lending industry is going nowhere, and a new proposal in the Legislature isn't likely to do anything to break the impasse.

A Senate bill, which would cap interest on payday loans at 5% - instead of the 20% typically charged on an initial loan - simply would drive the lenders out of business in the state, an industry spokeswoman says.

That would be just fine with state Sen. Glenn Grothman (R-West Bend), who sponsored the bill.

"They charge outrageous interest rates and they make poor people poorer," Grothman said.
I'm with Grothman on this one.

These predatory vultures belong in the lowest circle of Hell, one ring closer to the fire than the rent-to-own companies.

Back to the story:
In a typical payday loan transaction, a borrower writes a postdated check to the lender for the amount of the loan plus a fee - usually $20 for each $100 borrowed. The lender agrees not to cash the check for a short period, often two weeks, or in theory, the borrower's next payday.

Proponents say it's a better alternative than writing a check and having it bounce, which nowadays results in a fee of about $30 from the bank.
That's not a 20% interest rate. It's 20% interest for two weeks. That's an annual rate of 520%.

The people who get these loans, of course, are those who have nowhere else to go. They don't have credit and can't shop around. They are at the mercy of the loan sharks.

And here's the kicker -- often, those checks they have written to the payday loan company bounce anyway, adding another $20 or $30 charge to the borrower.

Even the Grothman bill allows an annual interest rate of 60%, by allowing a 5% charge while requiring the loans be for at least 30 days, rather than the current shorter terms. Given what borrowers are paying now, 60% sounds like a bargain basement rate. But that, apparently, is too low for the lenders to live with.

If they can't live with 60% interest -- while banks, savings and loans and credit unions are limited to 18% -- they should find another line of work.

There's another, even worse, variety of lender out there -- the internet loan sharks, who will loan you money if you agree to an automatic withdrawal from your bank account to pay them back. Their interest rates are astronomical, and they make it as difficult as humanly possible for you to pay off the principal, so they can keep taking money out of your account indefinitely. It may not be possible for states to regulate them, but the federal government should try to find a way. They may the payday loan people look like do-gooders.


At 11:47 AM, Blogger said...

I know a guy who got caught up with that mess.

If the check bounces they hit you with giant fees. Someone who is living on the edge can just forget about getting out of debt after a few weeks of that.

At 11:59 AM, Blogger Dad29 said...

If you really think that Banks "live on 18%," you need to get outdoors more often.

The AVERAGE gross (pre-tax) margin on MasterCard loans is 15%--which is before fees, late charges, etc., etc.

At 9:29 PM, Blogger milwaukeenorthshore said...

Push them out. Most communities are already changing their zoning to get rid of them. They only attract problems.

At 11:51 PM, Blogger 21stPuck said...

Thanks again, government, for saving us from ourselves!

At 6:40 PM, Blogger Sadhra said...

damn corporate amerika!

check out some of the interest rates that payday loan companies are allowed to charge here,

Mississippi ($400, 18%)
Missouri ($500, 75%)
Montana ($300, 25%)
Nebraska ($500, 15%)
Nevada (no limit, no limit)
New Hampshire ($500, no limit)
New Mexico (no limit, no limit)


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