Take out a payday loan, don’t repay it quickly — and fees and other charges soar through the roof. Particularly in Texas, this is a serious and growing problem.
The Center for Public Policy Priorities recently concluded that payday and auto title lenders charged Texans more in loan fees and trapped them in debt longer in 2013 than they did in 2012, even as consumers took out fewer loans.
Many of these borrowers don’t live below the poverty line; they are folks who have hit a bump in the financial road and need short-term help. But a trip to the payday lender can turn that bump into a mountain of money problems.
Fortunately, better alternatives to payday loans are emerging. In Brownsville, for example, the Community Loan Center, an employer-based alternative loan operation, provides people who need quick cash a way to access it — without roping them into hefty debt. The program has completed about 2,500 transactions amounting to $2.5 million in loans and has a default rate of about 5 percent, far less than the default rate of payday lenders.
How does the Community Loan Center do it? They work with employers and market the emergency loan option as an employee benefit. The organization provides one-year loans of up to $1,000 at 18 percent interest with a one-time fee of $20.
That’s not cheap money, but it is much better than payday loan rates. With the Community Loan Center, borrowers can cover emergencies like a car repair or medical bill and repay through payroll deductions.
Credit unions also are finding ways to become payday lending alternatives, testing payroll deduction plans that allow employees of participating companies to continue making payments into savings accounts even after they have repaid the debt. This encourages savings and discourages workers from having to run to predatory lenders.
In another innovative move, the West Coast company Activehours has created a smartphone app that allows employees of participating companies to request portions of their paycheck in advance.
These are worthy ideas that this newspaper would like to see take root.
Dallas and other cities already have passed regulations to control predatory practices of payday operations. At the federal level, the Consumer Financial Protection Bureau has hit Irving-based Ace Cash Express with a $10 million settlement and Fort Worth-based Cash America with a $19 million settlement over lending practices.
More can be done through credit unions, nonprofits and employers to help people who fall on hard times make better choices.
IN THE KNOW: Cracking down
This newspaper has advocated for policymakers to:
- Limit payday payments to an affordable percentage of a borrower’s income. Research indicates that monthly payments above 5 percent of gross monthly income are unaffordable.
- Spread costs evenly over the life of the loan.
- Guard against harmful repayment or collection practices.
- Require concise disclosures that reveal both periodic and total costs.
Among the cities that have stepped forward to adopt tougher payday lending rules: Dallas, Garland, Flower Mound, Denton, Austin, El Paso, Houston and San Antonio.
Cities we’d like to see do more: Fort Worth, Arlington and Irving.
