Predatory payday lenders rely on a certain number of customers being unable to quickly pay their bills. It’s a vicious business model that leverages desperation, and nowhere is it working more efficiently than in Idaho.
The average annual interest costs in the Gem State are 582 percent, and that leads the nation, according to a study by Pew Charitable Trusts. Loan costs balloon with high interest rates, origination fees and penalties for failing to repay on time, which is usually the next paycheck. Colorado has the lowest loan costs among states with storefront lenders (15 states ban them), but the rate is still 129 percent. It’s 192 percent in Washington.
Idaho was among seven states that had no limits on such loans when the survey was conducted. The Legislature did pass an industry-supported bill in the last session that adds some weak restrictions. It takes effect July 1, but it’s still too permissive.
For example, the bill would limit borrowers to a loan that cannot exceed 25 percent of their gross monthly income. But Pew reports that the average borrower can only afford to repay a loan that’s 5 percent of their monthly income.
So even under this reform, many borrowers will still have to take out new loans, at an average cost of $55 apiece, to pay off old ones. Pew notes that the typical payday borrower “has to repeatedly ‘re-borrow’ the money every two weeks, spends five months of the year in debt, and ultimately pays $520 in fees for the original loan of $375.”
Idaho lawmakers chose not to impose an interest-rate cap on payday loans. In Washington, the rate is 15 percent on the first $500 and 10 percent thereafter. Many states have chosen the 36 percent interest-rate cap that Congress adopted to protect members of the military from exorbitant loan costs. In 2010, Montana voters tossed the state’s permissive loan law and adopted the 36 percent interest rate cap. Voters in Ohio and Arizona also adopted caps.
Five years ago, the Washington Legislature passed reforms that have driven a lot of lenders out of the state. In 2009, there were 494 payday loan branches, but only 151 by 2012. Payday lending went from a $1.3 billion business in 2009 to $343 million in 2012, according to a Washington Department of Financial Institutions report.
The losers in that reform were the lenders, not the consumers.
The payday loan industry says such restrictions merely push customers onto the Internet for loans that cost even more. Pew studied that contention and found that in restrictive states, there wasn’t a big shift to online lenders. Instead, people cut their expenses or sought help from employers, family and friends. Those are all better choices than getting caught in a destructive cycle of short-term loans. People in these predicaments need credit counseling, not another loan.
Idaho ought to be embarrassed about leading such a list. Lawmakers should make amends by passing reform next time.