In the op-ed “Pay day lending is not harmful to low income borrowers” in The Hill's Congress Blog on May 6, 2016, Thaya Brook Knight of the Cato Institute argues why payday loans are a necessary product for those who need them. Knight’s defense of payday lenders comes as the Consumer Financial Protection Bureau prepares to announce new rules cracking down on the industry, which Knight says represents a paternalistic intrusion.
Knight’s case rests on three arguments. First, that borrowers take out multiple payday loans a year, indicating a satisfaction with the product. Second, that payday loans are used for routine expenses like rent and food. To cut off a borrower’s access to payday loans would endanger their ability to pay for these necessary expenses. And finally, that payday loans are needed due to the absence of suitable alternatives. These arguments represent a fundamental misunderstanding of payday loans, the dangers they present to borrowers, and a refusal to reform a broken industry.
Knight cites a Pew Charitable Trusts study that surveyed state regulatory data and found borrowers take out an average of eight payday loans per year, with a total value of $3,000. Knight argues the concept of “going back for more” should represent a borrower’s satisfaction with the payday loan, but this is far from the truth. Oftentimes payday lenders lure borrowers in with the promise of reasonable interest rates, only to dramatically escalate rates when the borrower extends the repayment schedule. The borrower is then forced to take out additional payday loans to cover their outstanding ones, creating a mountain of debt. Knight claims borrowers are out of debt from a payday loan in five months, but this fails to consider the additional debt they’ve taken on because of subsequent loans.
It’s a cycle I’ve seen far too often among my constituents in New Mexico. About one in four New Mexicans have turned to title and payday lenders charging interest rates averaging 300 percent. The average borrower takes out a loan of $630 and spends $1,250 to pay it back over a period of four months – if they can afford to repay it. Many refinance the original loan or borrow additional money just to pay the interest on their original loan and wind up in a spiral of disastrous debt. Their cars are repossessed, rent, utilities and other critical bills go unpaid, and their children go without basic necessities.
That cycle of debt is especially worrisome when you consider that, according to Pew, the borrowers surveyed use payday loans for expenses like rent, food, and utilities. A borrower unable to pay off their loan – who already may be thousands of dollars in debt – could risk losing their home or being unable to put food on the table. The idea of taking on debt just to get by is unimaginable and must be reined in. It’s why the Pew study cited by Knight concludes that “the payday loan industry is selling a product that few people use as designed and that imposes debt that is consistently more costly and longer than advertised.”
A flawed payday loan system, according to Knight, still provides a valuable lifeline to those who need it. But if the existing system puts the credit and future of its borrowers at risk, how valuable can it truly be? The solution, Knight says, is to develop new and better products to compete with payday lenders. On this point, we agree. Consumers should have expanded options not just to get the best deal available, but to avoid having to enter into an agreement with a predatory payday lender.
That is why I have partnered with the Coalition for Safe Loan Alternatives, an organization that brings together local banks, community and religious organizations and consumer advocates nationwide to develop innovative alternatives to payday loans. Already we’re seeing that work pay off. One of our coalition members, Employee Loan Solutions, offers affordable, safe loans through their TrueConnect program.
TrueConnect partners with employers that allows them to offer loans to their employees at a reduced rate compared to traditional payday loans. This year, the NM State Senate passed SM 27, a memorial requesting that the state personnel office study making this cost free and risk free benefit available to state employees. Surveys indicate that one in five government employees have taken out triple digit interest small loans. With wages largely frozen due to tight budgets, there could not be a better time to provide this service.
In addition, community-based organizations like Native Community Finance are providing low interest financial products and helping people trapped in predatory lender debt to refinance their loans at affordable rates.
We are doing our part to develop alternatives to payday loans, but more work is still needed to rein in the industry. My hope that the Consumer Financial Protection Bureau will recommend strong action against predatory lenders that take advantage of borrowers in need, locking them into perpetual debt and destroying their credit history.
As Thaya Brook Knight acknowledges, loans are needed to help those who need it. I could not agree more. The only questions is whether those in a position to help will do so in a responsible, safe way. For the sake of millions of people in need, I hope those changes will come sooner rather than later.
Javier Martinez represents District 11 in the New Mexico House of Representatives and is the Policy Director and General Counsel of the Partnership for Community Action