Cyrus Dugger

Don’t Fix What Ain’t Broke: Georgia’s Payday Loan Ban Works

New Report from Georgia Watch:

Don’t Fix What Ain’t Broke: Georgia’s Payday Loan Ban Works Executive Summary

Payday lending is a national problem. Payday lending is not a Georgia problem.

In dozens of other states, where payday lending is legal, powerful payday lobbyists have convinced lawmakers to exempt their industry from existing state usury limits. Payday lenders in these states charge over ten times the interest that most banks and credit card companies are permitted to charge and they repeatedly roll-over loans, generating new fee income without extending new credit.

The fee income payday lenders make from rolling-over loans is the lifeblood of their industry. Loan fees cost borrowers in other states $4.2 billion annually. But not in Georgia.

For two years, Georgia consumers have been spared the crippling cost of paying triple-digit interest on payday loans. Georgia has saved its families over $350 million in hard-earned income since banning payday lenders in 2004. Most of that money would have otherwise gone into the pockets of out-of-state companies. Instead, working families have used it to pay for groceries, school supplies and heating costs.

Payday lenders prey on our neediest citizens. While payday loans are marketed for meeting emergency needs, only 1 in 100 loans are made to borrowers who use the product once in a year. Ninety percent of loans go to borrowers who have five or more payday loans per year, and nearly two-thirds of total payday revenues are extracted from borrowers who take out 12 loans or more per year.

These types of numbers led researchers at the University of North Carolina to conclude that “the financial success of payday lenders depends on their ability to convert occasional users into chronic borrowers.”

In this report we find that:

* Georgia families save $147 million a year because the state’s usury rate cap prevents predatory payday lending.
* The existing small loan market in Georgia thrives—with consumer finance companies making $473 million in small loans each year.
* Allowing payday lending at triple-digit interest rates will only cause families to become trapped in a cycle of debt.

Policy Recommendation

* Georgia should continue to successfully protect its families by upholding its 60 percent usury cap for small loans.(read full report)

Cyrus Dugger: Author Bio | Other Posts
Posted at 1:08 PM, Apr 30, 2007 in
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I question the accuracy of the numbers provided above because I don't trust groups like the Center for Responsible Lending - which has been providing statistics widely quoted by the media - to report accurately on this issue. The head of CRL recently said that payday loan companies could operate and make a good profit under a 36% interest cap - and that is pure bull due to the fixed costs involved in processing a loan. Under the 36% cap now applicable to members of the military it is now illegal to say to any servicemember, "I will loan you $100 today if you will pay me back $100.10 tomorrow." You cannot even charge $1.40 for a $100 two-week loan, whereas independent third-party studies have shown the costs of making a payday loan are over $30 per loan.

But even if those numbers are accurate, the question is how many of those customers who frequently use payday loans want them effectively banned by an interest rate cap? The answer is approximately none. Independent surveys show a very high customer satisfaction rate with the industry and there are very few complaints made. And for every horror story that is brought forth and publicized by industry critics about people who get themselves into a bad situation by their own misuse of payday loans, there are ten stories of people who have avoided terrible tragedies because the payday loan option was available to them. There will always be foolish people who get themselves into trouble with every good thing including cars, fast-food, desserts, wine, etc. You can't ban everything because of that.

If you care about people who are having a hard time making ends meet then lobby the government to provide no-profit loans to them, don't seek to eliminate the only viable option that cash-strapped people now have in many situations while trampling on the freedom of service-providers to set their own prices in accordance with market conditions. Should the government be allowed to decide the prices of all goods and services and set a limit on what anyone can charge for anything? If the government can cap what a lender can charge then why shouldn't it be allowed to cap what a doctor can charge, a lawyer, a free-lance secretary, a housekeeper, etc. You either have a free market or you have a dictatorship. Consumer activism should be about curbing deceptive advertising, not telling merchants and service providers what they can charge.

Posted by: Jon Schultz | May 1, 2007 11:17 AM

Curiously, when discussing the "savings," you fail to report on the number of people in Georgia evicted, or who have their cars repossessed, or who can't buy groceries, because they were prevented from taking out a loan that they needed.

Posted by: David Nieporent | May 2, 2007 4:17 PM

Despite the bans and interest caps imposed by different states, the online payday loan industry cntinues to suck the life blood out of people who get ensnared in their trap. Because they operate from different locations outside of the regulated state and even outside the country, with only call centers in the US, they feel that they a not required to adide by those regulations. They also use collection tactics that border on terrorism like threatening to come to a persons job and have them arrested. The federal government needs to get involved in stopping these thugs.

Posted by: gary cunnane | May 3, 2007 11:58 AM