Two and a half years ago, a Columbian editorial offered an interesting comparison of hypothetical loans: Bob borrowed $100 from a friend and agreed to pay the friend $115 in two weeks. Seems like a pretty good deal, right? Jack, though, decided against a car loan because the dealer required an annual percentage rate of 391 percent, clearly outrageous in a business where single-digit APRs are common.
Many people might be surprised to learn that Bob and Jack were dealing with the same terms. Fifteen bucks on a $100 loan over two weeks is the same as an APR of 391 percent. It is this lack of understanding that to a large extent fuels the payday lending industry. And it’s a big industry in Washington: $434 million last year.
But it used to be much bigger. The statewide number of payday loans decreased from about 3 million in 2009 to about 1 million in 2010, and the number of lending locations has dropped 43 percent since the peak in 2006. Here in Clark County, the number of locations dropped from 17 in 2009 to nine in 2011.
These decreases are the results of wise legislation that took effect at the beginning of 2010. More equitable repayment plans are available, and an eight-loan limit is in effect. As Estelle Gwinn reported in a Monday Columbian story, Washington borrowers have paid $122 million less in loan fees since the law was passed. Full details are available in a report released last week by the state Department of Financial Institutions, which regulates the payday lending industry. (Visit: http://dfi.wa.gov/cs/pdf/2010-payday-lending-report.pdf.)
We do not dispute the attraction of payday loans to many people, but the law passed by the 2009 Legislature was necessary because it helps reduce the number of unwary borrowers who fall into a vicious cycle of dependency on quick-and-easy loans. Typically, those loans can be secured by the borrower’s post-dated check or by access to the customer’s bank account.
The payday loans’ annual percentage rates are still high (in the Bob-and-Jack stratosphere), but the repayment plan is now more helpful for borrowers. Previously, they could take out a payment plan (including a one-time fee) after four successive loans with the same company. Gwinn’s story quoted Marcy Bowers, director of the Statewide Poverty Action Network: “People would have to default a certain number of times and be pretty desperate. Then you had to pay to get in, which just doesn’t make sense.” But now, borrowers may take out an installment loan at any time prior to default, don’t have to pay a fee and have 90 to 180 days to repay the loan. The eight-loan cap also helps reduce the dependency.
The resultant reduction in overall loan fees paid is important as the state struggles to escape from the lingering economic crisis, especially as poverty rates rise. In Clark County, the number of people considered to be in poverty increased by 9,000 from 2008 to 2009, according to U.S. Census data cited in Gwinn’s story. Bowers said many of these people are “living paycheck to paycheck, then something happens and they fall into this (cyclical borrowing) trap. It’s very common to have medical issues come up where people just need to get a prescription … but don’t have very good heath care coverage.”
Added protections provided by the Legislature are paying off. Access to payday lending remains plentiful, while fair lending practices have been enhanced.