A single statistic – 260 percent – jumps out in Warwick Rep. Frank Ferri’s campaign to alter payday loans in Rhode Island.
That number, the effective APR or annual percent rate of a $10 charge for a $100 loan for a two-week period, surely seems excessive at a time when home equity loan rates are less than 10 percent and credit card rates can be as high as 30 percent.
Rhode Island law limits the maximum loan to $500 and rates and fees to 10 percent for the 14-day period. There is a debt limit of no more than the $500 loans at one time with an allowance of one roll over.
Payday loans allow borrowers to bridge cash shortfalls between paydays. The loans are typically short-term and unsecured, other than a postdated check that the borrower makes out for the loan amount plus interest to be cashed by the lender after the 14 days.
By state law, the maximum APR lenders can charge is 36 percent. Payday loans don’t fall under this limit. Ferri’s legislation would change this and require the 36 percent rate also apply to payday loans.
Advance America, the largest payday lender in the state with about 20 stores, claims Ferri’s law would force them to close their doors in Rhode Island. If that happened, they say, many Rhode Islanders would lose a valuable financial tool. Most banks don’t offer short-term loans and not everyone has a credit card. But, as Ferri points out, many users of payday loans are repeat borrowers who have fallen into a downward cycle of debt. They have become prey to the system.
The lenders aren’t without risk. According to studies, payday loans face a 10 to 20 percent default rate.
A study by the Pew Charitable Trusts found that most payday loan borrowers are white, female and are 25 to 44 years old. Five groups were identified to have higher odds of using a payday loan: “those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced." The average borrower is indebted about five months of the year.
In an ideal world, people wouldn’t be faced with financial crises; they would be financially responsible and have sufficient resources to live comfortably. We know that isn’t the case. Many people find it difficult to make ends meet and the payday loan becomes a way of making that happen.
On the other hand, as Rep. Ferri points out, the system allows for an exceptionally high usury rate [some states are higher] that takes advantage of these people and has them trapped. It’s a compelling argument to lower the allowable rate.
But it’s not a clear-cut debate. While on the surface a 260 percent interest rate is outlandish, payday loans have their place.