Time to cap payday loan interest

By Judy Lonning

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On March 1, the state Senate Human Resources Committee passed Senate File 388 - a bill aimed at cracking down on predatory payday lending. One Republican joined eight Democrats to move the bill out of committee. Given the discord between the parties on other issues, this just may be the issue Republicans and Democrats can agree on.

Payday loans are short-term, small-dollar loans up to $445. They are secured with a borrower's postdated check, meaning payday borrowers must have a bank account. For a $445 loan, a borrower would write a check for $500 (there is a $55 fee), then return two weeks later with $500 in cash and the lender will return their check.

The problem is that the loan is due in full in two weeks, or the borrower's next payday. No installments. According to the Iowa Division of Banking, the average payday loan borrower takes out 12 loans in a year. That means a lot of people take out more than 12 loans, and very few take out only one loan in an “emergency,” the latter being what the industry wants you to believe is the norm.

This is how the debt treadmill begins, as many borrowers must return the next day or visit another payday lender, taking out another loan to make ends meet until the next payday. When you convert all these fees and charges to an annual percentage rate (APR) of interest, these loans often exceed interest rates of 300 percent.

That's outrageous. Senate File 388 would address this issue by capping the interest rates charged by payday lenders at 36 percent APR; 17 other states have capped interest rates on payday loans or never authorized them in the first place.

Let us also not forget that this is usury. Banks, credit unions and small loan finance companies abide by a usury cap of 36 percent APR or lower. Many of them also offer small finance loans and alternatives to payday lending. To exempt loans of under $500 from the usury cap is to continue sending the message that it's OK for predators to take advantage of our desperation.

In 2007, Congress capped interest rates on payday loans to military personnel and their families at 36 percent APR. The Pentagon testified that payday loans caused such distress and anxiety to its soldiers that they posed a threat to the preparedness of our troops. Sounds like a protection we all could benefit from.

Also in 2007: The Iowa Legislature, in a bipartisan effort, passed interest rate caps on predatory car title loans. It is time to do the same with payday lending.

Judy Lonning of Des Moines is a retired teacher and is a board member of the Iowa Citizens for Community Improvement. Comments: jlonning@dwx.com