By Robert Mann
It should be among the easiest promises the candidates for Louisiana governor could make: “I will rein in the vultures who run payday lending operations and stop them from preying on the working poor.”
Every day across Louisiana, hundreds of people fall upon hard times. As the saying goes, they have more month left than paycheck. Imagine your car breaks down. If you can’t make it to work, you’ll lose your job, but you don’t have $100 for repairs. Instead of going to friends or relatives, you enter a payday loan office to borrow the money until you get paid again.
That’s your first mistake because most payday lenders impose outrageous interest rates compared to traditional lenders (banks that don’t make small loans or that won’t lend to someone with poor or no credit). According to Credit.com, “In most cases the annual percentage rate (APR) on a payday loan averages about 400%, but the [effective] APR is often as high as 5,000%.”
However, it’s not the hideous interest rates that most hurts borrowers; it’s their abuse at the hands of lenders who know – and hope – that these loans will not be repaid within the usual 14 days. The real money is the rollovers or “loan churn,” as the lenders call it. According to a September 2013 report by the Center for Responsible Lending, “borrowers on average take out nine loans per year, paying back $504 in fees alone for $346 in non-churn principal.”
But, back to that $100 you need to fix your car. Once inside a payday lending office, here’s what often happens, according to the Federal Trade Commission (FTC): You write a check for $115 (the extra $15 is the fee to borrow the money). “The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days.”
These loans are usually rolled over several times because borrower often cannot repay the loan and the fee. Thus begins a vicious cycle. “The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent,” the FTC says. “If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.”
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