Payday Loans Entrap the Most Vulnerable | Commentary
By Galen Carey As our economy continues to improve, there is a crushing weight holding many back: payday loans. While state and local leaders have taken up the cause in certain jurisdictions, this is a national problem that requires Congress to act. Unscrupulous lenders lure those who are already facing financial hardship into a debt trap from which it is very difficult to escape.
Drawn by slick marketing, desperate borrowers are induced to accept unfavorable terms they may not fully understand. The cost of a typical payday loan exceeds 300 percent annual percentage rate . By requiring full repayment from the next paycheck, payday lenders virtually guarantee that the borrower will be forced to ask for a new loan, with additional fees and interest, to pay back the old one.
This violates the underwriting standards applied to virtually every other type of loan. Payday loans perpetuate a cycle of debt, poverty and misery.
Three quarters of the fees payday lenders bring in come from borrowers, mostly low income, who have taken out 10 or more loans in a single year. More than half of all payday loans are renewed or rolled over so many times that consumers wind up repaying at least twice the amount they originally borrowed.
We have just come through the busiest season for payday lenders. Their ads promise an easy solution to the pressure of unbudgeted holiday expenses.
Parents understandably want to buy their children Christmas presents, and the lure of readily accessible extra cash masks a real threat to their financial health.
The reality is that a short-term loan almost always creates a debt that the borrower cannot repay in two weeks. Interest and fee payments balloon while the principal remains unpaid. The debt burden often continues long after the Christmas toys have been broken and discarded.
Last October, the National Association of Evangelicals addressed the devastating impact of payday loans with a resolution calling for an end to predatory lending. We are asking churches, charities, employers and government agencies to work together to help our members, neighbors and co-workers in ways that do not exploit them and lead to further misery. Other religious groups, including the Southern Baptist Convention, have made similar appeals.
The Bible prohibits usury, exploitation and oppression of those in need, and there is growing evidence that payday loans, as they are currently structured, often violate biblical justice. Predatory lenders who oppress the poor incur the wrath of God (Exodus 22:21-27). They should apply their expertise and resources to developing stronger communities rather than tearing them down.
Every family needs a rainy day fund to cover unexpected expenses from time to time. Churches should teach the spiritual disciplines of tithing and saving that position members to provide for themselves and generously care for others when special needs arise. It is our responsibility as neighbors and as churches to save and give generously, to provide the neediest among us with every possible opportunity to achieve and succeed. Churches, charities and employers should support households in their communities in times of crisis so as to prevent neighbors from being drawn into long-term debt.
In 2006, Congress passed bipartisan legislation capping the rates on loans issued to service-members at 36 percent annual interest. We need similar leadership from Congress today so that all Americans are protected from financial predators. The Consumer Financial Protection Bureau, an agency established to monitor the increasingly complex array of financial products offered to the American public, plans to unveil a new rule in coming months. We hope the bureau thoroughly investigates the payday industry and establishes just regulations and that Congress supports this process. State agencies should do the same. We need common sense guidelines such as requiring that loans be made at reasonable interest rates, and based on the borrower’s ability to actually repay.
Credit can change lives. It can be a source of opportunity or cause of devastation. How we use and safeguard this powerful tool is our choice. Caring for and lifting up our neighbors is our responsibility.
Galen Carey is vice president of Government Relations for the National Association of Evangelicals.
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