If the first rule of holes is, “if you find yourself in one, stop digging,” the second rule must be, “don’t throw the guy at the bottom a bigger shovel.” Unfortunately for California’s payday-loan borrowers – who often find themselves trapped in a bottomless pit of debt – a bill in the state Senate would allow payday lenders to hand their customers a much larger “shovel.”
Payday loans, which are obtained using a personal check, have extremely short repayment periods and excessive fees that equate to an annual percentage rate (APR) of 460 percent for a 14-day loan. Senate amendments to AB 377 (Mendoza) would allow California borrowers to write a personal check for up to $500 to secure a payday loan, up significantly from the current maximum of $300. State law already allows payday lenders to charge a fee of up to 15 percent of the face value of the check, and nearly all do, according to state officials. Therefore, under the proposed change, a borrower who writes a $500 check to a payday lender would get a $425 loan – which must be repaid in full in just two weeks or so – and pay a $75 fee. That’s quite a payday for payday lenders, which makes it easy to understand why this change is being advanced in the state Senate.
Is it really sound public policy to allow payday lenders to make larger loans? Not according to statistics released last year by the Department of Corporations and analyzed in our September 2008 report, Payday Loans: Taking the Pay Out of Payday. Payday loans encourage chronic borrowing because borrowers often lack sufficient income to both repay the loan and meet their basic living expenses. That’s why more than 170,000 Californians took out 13 or more payday loans in 2006.
Members of the Senate Banking, Finance, and Insurance Committee, which will consider AB 377 on Wednesday, should rethink this misguided effort to increase the size of payday loans – a change that would be a boon for payday lenders, while ensuring that more Californians would become mired in even more payday-loan debt.
— Scott Graves