The Free Press, Mankato, MN

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April 16, 2014

Minnesota should crackdown on payday lending

The United States hosts more than 23,000 payday lending stores, which outnumbers the combined total of McDonald’s, Burger King, Sears, J.C. Penney, and Target stores. These payday lenders do not make conventional loans as seen in most banks, but instead offer short-term loan amounts for short periods of time, usually until the borrower’s next paycheck, hence the name “payday loans.”

While some borrowers benefit from this otherwise unavailable source of short-term and small-amount credit, the payday lending business model fosters harmful serial borrowing and the allowable interest rates drain assets from financially vulnerable people.

For example, in Minnesota the average payday loan size is approximately $380, and the total cost of borrowing this amount for two weeks computes to an appalling 273 percent annual rate (APR). The Minnesota Commerce Department reveals that the typical payday loan borrower takes an average of 10 loans per year, and is in debt for 20 weeks or more at triple-digit APRs. As a result, for a $380 loan, that translates to $397.90 in charges, plus the amount of the principal, which is nearly $800 in total charges. How do lenders set up this exploitative debt trap? First, the industry does virtually no underwriting to measure a customer’s ability to pay back a loan, as they only require proof of income and do not inquire about debt or expenses. Second, the industry has no limit on the number of loans or the amount of time over which they can hold people in triple-digit APR debt.

These practices are both grossly unethical and socially unacceptable, as payday lenders prey upon the poor for the sake of profit, which in turn leads to a cycle of debt among the poor, which includes longer-term financial harms such as bounced checks, delinquency on other bills and even bankruptcy.

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