Payday Lending is Just a Really Bad Idea

During the course of each two-year session of the Pennsylvania state Legislature, more than 2,000 different bills will be drafted and introduced, but only a handful will ever see any formal legislative action.

The system is set up to make it extremely difficult to get a bill all the way through the process and signed into law. In theory, bad bills never make it very far and only the good bills survive.

Unfortunately, every once in a while a really bad bill works slips through the cracks before anyone realizes what happened. One of the best examples out there would be the push to legalize “payday loans” in Pennsylvania. A bill to legalize this practice passed the House last year (I voted ‘no’) and died in the Senate, but will likely be coming back around again this year.

Payday loans are low-dollar, very high-interest loans, which usually carry triple-digit interest rates of 300 percent annually or more. They are called payday loans because they generally must be paid back in full—with all interest and fees—on the borrower’s next payday. These loans have long been illegal under Pennsylvania law. Our state strictly regulates small-loan lenders: unlicensed lenders may charge only 6 percent interest annually and lenders licensed by the Banking Department may charge higher rates of about 24 percent annually.

Payday lenders market these loans as “short-term” or “emergency” loans, but they’re really little more than a scam designed to drain consumers dry. Because the loans are so expensive, secured by access to the borrower’s checking account, and due in full just two short weeks later, most people who take out a payday loan are unable to pay it back and still have enough money to pay for their regular expenses.

Borrowers then have to either renew the loan or take out another payday loan shortly thereafter just to make ends meet. This creates a vicious cycle of debt that can be almost impossible to break.

The U.S. Department of Defense conducted a comprehensive report on payday lending and concluded the average borrower pays back $864 for a $339 loan. Payday loans were so harmful to the finances and military readiness of our service members that Congress established a 36 percent APR rate cap for military families.

There is a large coalition of groups opposing payday lending, including AARP Pennsylvania, Pennsylvania AFL-CIO, Pennsylvania Council of Churches, Housing Alliance of Pennsylvania, Veterans Leadership Program of Western Pennsylvania and many more. They offer some simple but compelling reasons why payday lending is really bad for Pennsylvanians.

First, small loans are already effectively regulated in Pennsylvania. A 2010 Pennsylvania Supreme Court unanimous decision held that Pennsylvania’s existing law applies to payday loans made over the Internet. Licensed lenders can already charge about 24 percent annually in Pennsylvania. Loans made at rates above this amount are void and unenforceable, even when made on the Internet.

Second, they say legalizing predatory payday loans leads to long-term financial harm. A payday loan is a debt trap by design, causing borrowers to be stuck in high-cost debt for five months of the year. Payday loans lead to higher rates of bankruptcy, delinquencies on other bills, overdraft fees, and the loss of bank accounts.

Finally, opponents say legalizing payday loans creates the problem it claims to solve. Credit counselors, social service agencies, churches, and others report that they rarely, if ever, see people trapped in an illegal Internet loan. In the rare case they do, it’s easy to resolve because the loan is void and unenforceable.

Pennsylvania’s current law works effectively, and there is no good reason we should allow a predatory practice like payday lending to come to Pennsylvania. For more information and a full list of organizations opposed to payday lending, visit www.stoppaydayloanspa.com.