4 Ways the Payday Loan Industry Sucks Billions From Local Economies (Hard Times USA)
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The good news is that the payday loan industry appears to be shrinking nationally, as the interest payments in the 33 states that allow these bloodthirsty loans have fallen from $6.8 billion in 2007 to $3.3 billion in 2011, a new study by consumer groups found.
But the bad news is that this industry—whose short-term loans have outrageous interest rates that are disguised as fees—is still sucking billions from poor people. And the ripple effect of payments is depleting hundreds of millions from local economies, undermining job creation and pushing people into bankrupcty, the Insight Center for Community Economic Development study found.
“It is a good thing that it has dropped,” said author Tim Lohrentz, speaking of the fall in interest payments since 2007. “It’s a bit counterintuitive. The cost of doing business has become higher for payday lenders. A lot have gone out of business or have consolidated operation. This drop is more about the supply, not the demand, for the loans.”
Lohrentz’s study, sponsored by the Center for Responsible Lending, comes as state and federal regulators are looking at more regulation of payday loans. These are small, short-term loans that average about $375 whose interest rates would exceed 300 percent if they were annualized like credit cards. Borrowers in Calfornia, for example, pay a $45 “fee” for a $255 loan, Lohrentz said, explaining how the industry works.
Every state allows consumer loans, but 33 states allow loans with rates that higher than 36 percent, he said. Payday loan payments typically are due within two weeks and can be taken directly from paychecks or bank accounts. Some states, like Washington, have capped interest rates on these loans at 36 percent. Others have limited how many times an individual can take out one of these loans annually.
Many payday loans companies are national firms that specialize in the loans, but in recent years Wall Street's institutional investors and large banks have also put multi-millions into these businesses. These investors include Barclays Global Investors UK Holdings Ltd., The Vanguard Group, Bank of New York Mellon Corp., JPMorgan Chase, Bank of America and even the California Public Employees Reirement System (CALPERS).
The Insight Center’s study sought to measure how these “debt traps” affect the lives of borrowers and local economies, including job creation. Its study had four surprising findings showing how payday loans perpetuate the cycle of hardship and poverty.
1. Millions not spent locally. The study noted that in 2011, the total interest payments made by borrowers in 33 states was $3.3 billion, with California, Texas, Mississippi, Illinois and Alabama paying the most interest. But then it looked at how much of the interest payments were being diverted from local economies and concluded that “the payday lending industry had a negative impact of $774 million in 2011.”
2. Kills local job creation. The study found that payday lending drains $2.5 million from local economies daily. “In addition, we estimate that more than 38 people lose their jobs each day due to the economic drain of payday lending. Far from creating economic opportunity, payday lending creates impoverished households and endangers local economies.” All told, the study said that the loans have led to the “loss of more than 14,000 jobs” in 33 states.
3. Pushes people into bankruptcy. The study found that “payday lending caused an estimated 56,250 Chapter 13 bankruptcies in 2011,” adding that “with an average cost of $3,000 per bankruptcy [in legal fees], these bankruptcies cost the economy an additional $169 million.”
4. Total local losses about $1 billion. The economic impact of loan payments that divert money that otherwise could be spent locally ($774 million), and bankruptcy fees tied to payday loans ($169 million) “brought the total loss to nearly $1 billion,” the study said. These costs do not reflect the emotional pressures and trauma that come from living under a worsening cloud of debt.
Payday loan industry lobbyists have argued that they provide a service by helping people pay bills, which in turns fuels local business activity. “This study examines these claims,” the Center’s report said, concluding that “increasingly, states and local governments are moving to limit payday loans based on concerns that high fees and short-term lump sum payment often lead to a series of repeat loans.”