Addressing payday demand

What to do about payday lenders, those storefront operations promising quick cash for a postdated check and a “small” fee?

The payday industry preys on the very people who can least afford it, effectively charging borrowers 10 times the rate of a high-interest credit card, nearly 100 times the interest you'd pay on a secured loan from a bank. Usually on loans that don't add up to more than a couple hundred bucks.

People take out the loans to get through a tight week, but according to the state Attorney General's Office, nearly half of Iowans who use the service borrow from payday lenders more than a dozen times a year, paying more than 400 percent in interest - not infrequently borrowing again just to cover their previous payday loan.

In fact, researchers say users of these “emergency” loans end up worse off than people in similar straits who figure out other ways to make it to payday. They are more likely to suffer financial hardship, to lose a conventional bank account, to become delinquent on credit cards or file for bankruptcy.

The payday industry is growing - there are 522 delayed deposit operations licensed for business in the state. Just two years ago, there were 435. That's got cities looking for options to curb the growth of payday options within their jurisdictions.

The problem is, cities' hands are mostly tied. The state regulates the meaningful bits, like which and how many businesses are licensed to run payday operations, the terms they can offer customers and the interest they are able to charge. But state legislators have declined time and time again to tighten restrictions on the problematic businesses.

So Des Moines, West Des Moines and Clive have passed ordinances limiting where payday lenders can operate. City council members in Ames expect to review a similar ordinance this spring.

Now, Iowa City is looking at the same. City council members were scheduled to discuss the issue at a work session last night, after this column went to bed.

But there's a second problem, besides cities' limited power to regulate payday lenders.

Often as not, it isn't that the folks who turn to payday lenders don't know they're being ripped off, it's that payday loans are the only option for too many high-risk, low-income borrowers trying to make it to their next paycheck.

Until more lenders step up to offer small-dollar loans to low- and mid-income borrowers with less than stellar credit, too many Iowans will remain caught in the payday loan cycle.

Comments: (319) 339-3154; jennifer.hemmingsen@sourcemedia.net