You have probably seen those storefronts that promise “quick cash” or “instant loan approval.” In reality – these kinds of “payday loans” result in long term debt – not quick financial fixes. On average, Kentucky payday lenders keep borrowers indebted for 137 days a year – much longer than the advertised 2-week loan. Kentucky payday lenders charge an average of $15.00 per $100 borrowed, plus additional fees every two weeks. This means payday loans carry at least a 391% APR. Congress developed the APR, or Annual Percentage Rate of Interest, as a standard measure that calculates the annual interest rate on loans (including most fees). For more information – see the Center for Responsible Lending.
Two recently released reports provide even more evidence that payday loans are not good for Kentucky families – or for the Kentucky economy. The first report released in March 2013 from the Insight Center for Community Economic Development (Insight Center) found that payday loans issued by payday lending establishments in 33 states (including Kentucky) cost the American economy $774 million in 2011, resulting in the estimated net loss of more than 14,000 jobs. These costs, plus an increase in Chapter 13 bankruptcies linked to people who could not afford to repay their payday loans, brought the total loss due to nearly $1 billion.
While payday lending does generate some economic activity since people who take out loans have pocket cash to spend, the gains are less than the resulting losses. Most families end up paying back 400 percent of the original cost of the loan – resulting in reduced household spending. In 2011, payday lenders received interest payments totaling $3.3 billion. But each dollar of that interest subtracted $1.94 from the economy through reduced household spending while only adding $1.70 in spending by payday lending establishments. The net impact is that for each dollar of payday lending interest paid, an estimated 24 cents is lost to the United States economy.
The second report is a white paper from the Consumer Financial Protection Bureau (CFPB). In the last year, CFPB has been researching the impact of payday loans on borrowers by surveying and talking to borrowers. The products may work for some consumers who need to defer an expense for a short period of time – but these borrowers also have sufficient cash flow to pay off the loan on time. These loans become harmful for consumers when they are used to making up chronic cash flow shortages. Two-thirds of borrowers in the sample had 7 or more loans out in a year, indicating most of the loans are not used for a short-term fix.
These reports serve to further highlight that payday loans hurt families in Kentucky. It isn’t too early to start looking ahead to 2014 and figuring out how our legislators can help families in Kentucky by limiting payday lending. Solutions that have worked in other states to curb predatory lending include capping the interest rates for payday loans at 36 percent and limiting the number of times per year an individual can take out a loan.