Tuesday of this week, the Council of the District of Columbia voted to bring Washington DC payday lenders back under the 24% annual interest rate cap. 24% is a far cry from the 350% to 550% that consumers had been charged since an exemption granted to DC payday lenders in 1998 allowed them to ignore the usury cap. Reading the comments of the council members was rather telling: “It’s like an alien species let loose in our midst.” “They steal money; they steal futures with their practices.”
Payday lending is the practice of using a post-dated check or electronic account information as collateral for a short-term loan. The industry sells themselves as a “short term financial solution” … the research, however, suggests that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need.
Consider the following:
- 91% of payday loans are made to borrowers who use 5+ payday loans/year.
- 99% of payday loans go to repeat borrowers.
- The average payday borrower pays $800 to borrow $325.
- Average APR charged nationally – 680%.
These numbers support those found in Washington DC where the 60,000 residents using payday loans last year had over 700,000 transactions (an average of nearly 12 per borrower per year). That sounds more like a long-term problem than a short-term solution …
Congress recently passed legislation capping annual rates of 36% for loans to military families. While this is set to take effect on October 1st, there are many consumer advocates that are worried that predatory products will still be sold because of the narrow definitions that are established in the law. It is estimated that over ¼ of military households have been caught up in payday lending (NY Times). In many college towns, students are a primary target – be careful!
(Source – Center for Responsible Lending).