The Legislature is trying to improve payday loans. By doubling the amount that can be borrowed. By extending the term. By allowing consumers to take out more loans each year.
It may not be as bad as it sounds.
Payday loans are short-term loans with high fees and high interest rates. Depending on how long it takes the consumer to repay the loan, the effective cost can be 200 percent or more of the loan amount. But many consumers who do not have bank accounts or credit union memberships have found payday loans to be accessible, no matter the costs.
Banks and credit unions have tried to step into the business, but have difficulty competing with low-overhead payday loan shops.
Prior to reforms made in 2009 by the Legislature, the loans became a treadmill for consumers who repeatedly rolled over the debt, incurring more punishing fees in the process. Now, consumers can take out only eight loans of no more than $700 per year, and they are entitled to work out an installment plan for an unpaid balance.
The industry was already starting to contract, but the reforms squeezed out many of the smaller operators. The business also took a hit when Congress restricted loans to members of the military, whose debt obligations were compromising their security status and the readiness of their units. Lending activity declined by one-third between 2005 and 2011, the most recent year for which the Washington Department of Financial Institutions has a report.
Now, the industry is back with a new product owners say can lower consumer costs even if they borrow more money; up to $1,500.
Of course, that depends on how fast they can repay the loan. The interest cap remains the same – 36 percent – but there is a $225 origination fee for that $1,500, and a monthly $90 maintenance fee. Monthly payments can consume no more than 15 percent of a borrower’s income.
If, somehow, consumers can repay the loan within one month, they will save $110 compared with the cost of the $700 product. But the longer it takes to repay the loan, the more expensive it becomes. That $1,500 becomes a $3,160 obligation after one year.
But proponents say most consumers in Colorado, which has a similar law, pay their loans off early. And, they add, if Washington-based companies such as MoneyTree cannot offer this product, consumers will find it on the Web, where unscrutinized and unscrupulous international lenders will be happy to help. Lenders based on reservations, where enforcement is disputed, are also in the market.
DFI can do little more than issue warnings on the bad Internet actors, and hope consumers get the message when searching for a lender online.
Reports conflict on the magnitude of that threat. And the Washington legislation passed out of the Senate last month, and since revised as ESSB 5312, may need more review than its so-far rapid progress has allowed.
There are some good consumer safeguards written into the bill, but does the state want them in debt twice as deep as they can get now?