Theresa Lavamaki of Cloquet took out a payday loan in Superior a while back for $400 and was shocked that she had to pay back a total of $556. Wisconsin payday loans are largely unregulated and can charge virtually any interest rate company owners choose.
Even so, Lavamaki says they’re a good deal, especially in Minnesota, which has a law that governs the short-term loans.
Clearly, others agree. In 2006, according to figures compiled by the Legal Services Advocacy Project in St. Paul, Payday America made 2,900 loans in Duluth and S&P Loan Co. made more than 5,800 in Cloquet, Grand Rapids, Hibbing and Virginia. More than 187,000 such loans were made in Minnesota last year.
his year, some legislators tried to make the law more consumer-friendly. But bills that would either close a big loophole or curb interest rates charged by payday lenders probably are dead for this legislative session because of committee inaction.
So businesses such as Payday America in Duluth and S&P (where Lavamaki works) continue business as usual in the state.
Simple concept
The concept behind payday loans is simple. If you need to borrow a small amount of money, you can fill out some forms and write a postdated check for the amount you wish to borrow, including interest and fees. The lender will hold the check until your next payday, usually a couple of weeks away. When payday comes, you pay off the loan.
Right now in Minnesota, the maximum loan amount is $350. Under the current payday lending law, however, the true annual percentage rate is 390 percent for borrowing $100 for two weeks. That’s 10 percent of the amount of the loan plus a $5 fee, or $15. A $350 payday loan can by law charge 6 percent of the amount of the principal and a $5 fee, or $26.
However, larger companies in 2004 found a major loophole in Minnesota law that allows them to register with the state as industrial loan and thrifts. That allows them to make short-term loans of up to $1,000 at a 686 percent annual percentage rate.
The bills in the Legislature would have done things such as bringing all 24 of the state’s payday lenders back under the umbrella of the payday lending law, reducing the annual percentage rate to 36 percent and allowing borrowers to repay under installments plan, which would save them money in interest and fees.
Even though such small-loan services are popular, all of four payday lenders contacted for this article refused or didn’t respond to requests for comment.
While some people find occasional use of payday loans to be a convenient way to deal with a financial emergency, problems begin when borrowers can’t pay back the loan, said Dan Williams, senior program manager at Lutheran Social Service Financial Counseling in Duluth.
Here’s an example from S.F. 3197, a payday lending bill introduced in the Minnesota Legislature this year that would raise the loan amount to a maximum of $600: If you borrowed $500, and took out five loans you would repay the loan company a whopping $2,650. If you had a five-payment installment loan, as proposed in the bill, you’d pay back a total of $530.
Sixty percent of payday loan customers take out more than 12 loans per year and 25 percent take out 21 or more loans each year, according to the Legal Services Advocacy Project.
Williams said he has seen cases where people in deep debt have been pushed into bankruptcy after taking out a payday loan for an emergency. Even when the situation isn’t that dire, they’re taking money from cash-strapped people that could be used for other purposes, Williams said. “Sometimes people think that’s their only option,” he said.
However, the Federal Trade Commission suggests a number of alternatives such as taking a small loan from a credit union or small loan company or asking for an advance from your employer. Starting an emergency savings fund is the best answer, Williams said.
Winning elsewhere
Despite inaction in Minnesota, consumer advocates who oppose payday lending continue to win victories in some states. Most recently, this month the Arkansas attorney general ordered all payday lenders to cease doing business. Currently, 11 states have prohibited them by law and another 35 states allow them, according to the Consumer Federation of America.
And while there are plenty of arguments against payday lending, some well-respected academics and agency researchers say there’s a place for them.
Donald P. Morgan and Michael R. Strain of the Federal Reserve Bank of New York looked at data from Georgia and North Carolina since those states banned payday loans in 2004 and 2005 only to find that households there have bounced more checks, complained more about lenders and debt collectors and filed bankruptcy more than in states where payday lending is allowed.
A bounced check can cost $25 to $35 in the Duluth area, while a one-time $100 loan would cost $15.
Another study conducted by professors at George Mason University and Colby College as well as an independent economist found that payday loans increased the financial survival of 318 study participants by 31 percent. However, the study showed that if the loans are used too much, the benefits decline.
source:http://www.duluthnewstribune.com/articles/index.cfm?id=63447§ion=homepage&freebie_check&CFID=21453319&CFTOKEN=74734167&jsessionid=8830141ad2d64f1b6e72
