Washington Week: Student Voices (O)

COLUMN: Many are vulnerable to payday loan nightmare
By Lee Heerten
Daily Nebraskan (U. Nebraska)
03/08/2007

(U-WIRE) LINCOLN, Neb. — There is always too much month at the end of the money.

What's a broke college student to do when rent and utilities are due, there's no groceries and the university has decided you need to pay your bill before you can charge any more fast food on your NCard?

I did the only logical thing - I went online to my Wells Fargo account and, with a few clicks, magical money appeared in my account. It's a service called Direct Deposit Advance, and it's dangerously easy.

You enter the amount of money you want, the bank informs you that you'll be charged $2 for every $20 it gives you and that you'll pay back the borrowed amount plus the fee when you receive your next direct deposit paycheck.

It's easy and convenient and, at least for me, a little magical. It's only if you read further that you discover what else it is: expensive. In order to discover just how expensive the service is, you have to download Wells Fargo's 15-page "Service Agreement and Product Guide."

You are paying 120 percent annual percentage rate (APR). Those 30ish percent interest credit cards that your mother warned you about suddenly don't seem that bad.

A 120 percent APR loan doesn't seem that bad either when compared to a loan with an APR of 391 to 443 percent. That is the average APR that the Center for Responsible Lending found comes with payday lending.

Payday lending is similar to Wells Fargo's direct deposit advance. You write the lender a postdated check for the amount of the loan, plus a fee, and the lender gives you cash. Of course the service comes with a price, one much higher than the advertised fee.

Extreme interest rates are only the first cost associated with payday lending. The rates don't take into account the borrower's ability to repay the loan, maximizing the chance that a consumer will pay additional fees. The short loan period forces borrowers to renew the loan several times, increasing the cost.

The entire system is predatory. And you're the prey.

The payday loan industry targets those who some consider as not financially savvy - students, the working poor and minorities. Studies in North Carolina found three times as many payday lenders per capita in black neighborhoods than white neighborhoods, even when controlling for income disparities.

Last fall, Congress went as far as to deem payday lending a threat to national security. Alarmed by Department of Defense reports that payday lenders were targeting soldiers and their families and concentrating around military bases, Congress capped the loan rate to military personnel and their spouses at 36 percent.

Former U.S. Sen. Jim Talent said, "We need to enact these new protections for our troops and their families because a growing predatory lending problem has impacted our operational readiness."

If payday lending is dangerous enough to cap for military families, then it's dangerous enough to cap for all of America's working families. For a Congress and presidency so intent on saving the American family, we should expect nothing less. It'd certainly do more good for families than their other attempts at promoting "family values."

Capping the interest on payday loans wouldn't be without precedent either. Canada deems any interest rate higher than 60 percent to be criminal. So far 10 U.S. states have banned or capped interest on payday loans.

Apparently the payday loan industry has realized the public has caught on to its scheme.

Last month the Community Financial Services Association (CFSA), a payday loan industry advocacy group, launched a $10 million ad campaign to revamp the payday loan image. The ads tell consumers to only borrow what they feel comfortable repaying and not to borrow for frivolous expenses.

The campaign may promote a different image of the industry but does nothing to change its practices.

If anything, the campaign reinforces the misconception that lenders provide a needed service and that there is no alternative to outrageously expensive loans by flashing images of children in hospitals and broken cars.

Emergencies do happen. Taking advantage of those emergencies does not constitute providing a service.

People in financial emergencies have more options than a payday loan.

A simply call to your creditor can in some cases get you an extension till your next payday or another type of payment plan.

There are credit cards and consumer finance agencies specifically for people with poor credit. Not to mention emergency assistance programs that are in place specifically to help in these types of situations.

Charging exorbitant interest to those facing emergency situations is wrong. Sorry, CFSA, there's no way to spin that.

The industry needs reform, badly.

A good first step would be for Congress to cap the interest rate on payday loans for all Americans. Then it could address the other problematic issues that go with it - putting limits on the number of payday loans a consumer can take and the number of times they can renew a single loan.

Ultimately, they could do something positive to help American families.

[ Back to Student Voices ]