Ohio's 1995 legislation that enabled the practice of payday lending now looks like a classic case of good intentions gone awry. The idea was to allow people with modest incomes and checking accounts to take out small, two-week loans from check-cashing outlets, giving them quick access to cash to tide them over until their next paychecks.
Lenders were permitted to charge high fees, $15 per $100 loaned, on the theory that people would make one-time use of this service in emergencies.
But too often, it hasn't worked that way for cash-strapped Ohioans who use payday lending as a last resort. By the time they get their next paychecks, they find themselves unable to pay back the loan plus fees, so they end up taking out a second loan to pay the first one, and on and on.
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The result, payday lending critics say, is a "cycle of debt" - often a downward spiral - that lasts an average of 18 months and sucks hundreds of dollars in fees from Ohioans who can least afford what amounts to an annual interest rate of up to 391 percent.
It's a situation crying out for reform, so three bills addressing it are before the Ohio legislature.
One, supported by the payday industry, would give consumers more time to pay off the loans, but would not reduce the fees. Another, sponsored by Rep. Tyrone Yates, D-Cincinnati, would limit the loans to the equivalent of a 25 percent annual percentage rate (APR) and prevent lenders from using post-dated checks as collateral - measures that might simply kill the industry.
The best approach may be the bill sponsored by Rep. Bill Batchelder, R-Medina, a long-time critic of payday lending, and Rep. Robert Hagan, D-Youngstown. It would cap the APR at 36 percent, prohibit loans to any consumer with an outstanding payday loan, and establish incentives for financial institutions to create alternative loan programs.
There's a legitimate need for small, short-term loans, but not when the loan terms outstrip borrowers' ability to repay. Some credit unions offer alternatives - "stretch pay" loans at 18 percent, with a portion of the fees going to establish savings accounts. This is a better approach. Coupled with initiatives to encourage financial literacy and to help the "unbanked" gain access to financial services, it could not only keep working Ohioans out of that "cycle of debt" but get them started on a cycle of building wealth.
source:http://news.enquirer.com/apps/pbcs.dll/article?AID=/20080126/EDIT01/801260352/1090/EDIT
