The recent report by Bill Policy Center and the Center for Policy Entrepreneurship…
February 15, 2008The recent report by the Bell Policy Center and the Center for Policy Entrepreneurship misrepresents payday advance customers and the businesses that serve them. As the national association of responsible payday lenders, we want to set the record straight.
Report allegation: Payday advance fees are “exorbitant”
Reality: Payday advances are small, unsecured, short-term loans, usually due on the borrower’s next payday. They are short-term transactions, not annual loans. In Colorado, for each $100 advanced, customers pay $17 (based on the regulator’s reported averages). The average payday advance in Colorado is approximately $350 with an average fee of $59.
Customers use payday advances to cover small, unexpected expenses between paydays. They are people who have a bill to pay today and choose between: bounced-check fees; overdraft protection fees; incurring late fees; borrowing from friends or family; or taking out a payday loan.
Consider the fees: $100 payday advance= $20; overdraft protection= $29; late fee on credit card bill= $37; $100 off-shore internet payday loan= $25; bounced check and NSF/Merchant fee= $54.
Report allegation: Payday advance customers are low-income
Reality: Payday advance customers are hard-working middle-class Coloradoans who face unbudgeted or unexpected expenses between paychecks. The majority of payday advance customers in Colorado are middle class people with incomes between $25,000 and $50,000 per year. Nearly 60% of payday advance customers in Colorado have attended college and most hold major credit cards. All payday advance customers in the state have jobs and bank accounts, and the vast majority of payday advance customers pay off their loans in a timely manner.
Report allegation: Payday advances trap customers in a “cycle of debt”
Reality: This allegation is not valid. Under Colorado law, any customer who cannot payback their loan when due will have the option of entering into an extended payment plan, allowing them to repay the loan over a period of additional weeks. This option will be provided to customers for any reason and at no additional cost.
Report allegation: Payday advance customers, on average, pay $544 in interest on a $343 loan
Reality: The figure used in the report is absolutely wrong. To come up with that number, they count the principal for only one loan but add the fees for nine loans- an impossible scenario. The average payday advance in Colorado is approximately $350 with an average fee of $59 for 18.5 days.
Report allegation: Capping the annual percentage rate at 36% would be good for consumers
Reality: An interest rate cap of 36% would result in the elimination of payday loans in Colorado. Payday loans are two-week loans and cannot be offered at the same APRs as annual credit products. At a 36% APR, the total fee charged on a $100, two-week advance would be $1.38. Payday advance lenders could not cover the cost of originating a loan, let alone meeting employee payroll and benefits and other fixed business expenses.
Eliminating payday loans as an option will not eliminate the need for short-term credit, but will only drive consumers to unregulated off-shore Internet lenders or force them to choose between more expensive alternatives such as fees for bounced checks, overdraft protection, or late bill payments.
For perspective, Goodwill, a non-profit, tax-exempt charity, charges customers almost $10 per $100 borrowed (i.e., 252% APR) for their “Good Money” payday loan. For-profit payday lenders in Colorado pay taxes, employee salaries and health care, rent and overhead costs. The few dollars more they need to break even, pay taxes, make a profit and keep their businesses running makes sense for the borrowers, employees and the tax coffers. Even the Goodwill could not offer payday loans under a 36% APR.
Shutting down Colorado’s payday advance industry by imposing a cap of 36% APR would put roughly 1,800 Coloradans out of work. It would result in an estimated $55 million in lost payroll tax revenue, as well as millions more in lost rental and lease income and millions paid in unemployment insurance. In addition, it would also jeopardize the health care and retirement benefits of Colorado families and professionals who earn their living in the payday advance industry.
