Pay Day Lenders Rip off the Poor

MULLINS — Kathryn Gales was a 56-year-old widow when she made a series of decisions that left her without a car and hundreds of dollars in debt to payday lenders.

“I was stupid,” Gales says, sitting in the living room of her one-bedroom apartment. “I did it on my own, but it was a bad mistake. It just turned into a mess.”

Gales’ debts were eliminated after her pastor intervened and a lawyer sued the lenders.

But critics of payday lenders say that outcome is rare for the thousands of South Carolinians who take out payday loans each year. Those critics want tougher state restrictions on the sky-high- interest-rate lenders — or an outright ban.

Payday lenders say most of their borrowers are responsible and don’t get caught in a spiral of debt.

Government should not step in to limit consumers’ choices, they add. They say their service allows people to get small amounts of money at a cost that is less than a chain of bounced checks or utility cutoff fees.

This week, nearly 10 years after it legalized payday lenders, the S.C. General Assembly is on the verge of deciding whether to restrict them.

Every year, payday lenders strip $4.2 billion in excessive fees from Americans who think they're getting a two-week loan and end up trapped in debt. This report finds that across the nation payday borrowers are paying more in interest, at annual rates of 400 percent, than the amount of the loan they originally borrowed.

Despite attempts to reform payday lending, now an industry exceeding $28 billion a year, lenders still collect 90 percent of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.

Based on data collected by state regulators, financial records released by payday lenders, and assessments by third-party analysts, we update our 2003 quantification of the cost of predatory payday lending to American families. Breaking down the impact by state, we also calculate the savings to families in states that have banned payday lending.

In this report, we find that:

• Ninety percent (90%) of payday lending revenues are based on fees stripped from trapped borrowers, virtually unchanged from our 2003 findings.  The typical payday borrower pays back $793 for a $325 loan.
• Predatory payday lending now costs American families $4.2 billion per year in excessive fees.
• States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.