LAMPa advocates have worked tirelessly to help defeat repeated efforts to introduce payday lending bills that would end the Commonwealth’s strong consumer protections against abusive loans. Check back for updates on new legislation.
Payday loans are small-dollar, extremely high-cost loans, which typically carry triple-digit interest rates of 300% annually or higher. 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.
While payday lenders market these loans as “short-term” loans, they really are just a debt trap. 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. Once borrowers pay back a payday loan, they have to take out another payday loan to keep the lights on and food on table. This begins the debt trap cycle.
In fact, payday lenders depend on the debt trap as the core of their business:
• Data show that 76% of payday loan revenue is generated by borrowers caught in the debt trap—borrowers who, after repaying one payday loan, cannot make it to their next payday without having to borrow again;
• The typical payday borrower remains in debt for about 200 days a year;
• According to a comprehensive report on payday lending conducted by the Department of Defense, “The debt trap is the rule not the exception: 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% APR rate cap for military families.
Long term financial harm associated with payday loans include:
• Increased incidences of delinquency on other bills, delayed medical care, and overdraft fees;
• Filing for bankruptcy: payday borrowers are twice as likely to file for bankruptcy as applicants whose request for a payday loan was denied;
• Increased likelihood of food stamp usage, delinquency on child support payments, and involuntary closure of bank accounts.
Thankfully, Pennsylvania’s strong laws effectively prevent these harms in the Commonwealth, and every effort must made to uphold existing protections.
Organizations such as the U.S. Department of Defense and Pew Charitable Trusts have determined the Pennsylvania’s laws are among the strongest and most effective in the country in protecting against predatory payday loan abuses. Experiences from the military and other states show that weaker laws with provisions like databases, rollover bans, and extended payment plans do not stop the payday loans debt.
The Pennsylvania Supreme Court has ruled that our law applies to loans made over the Internet to Pennsylvania borrowers. Our Banking Department has successfully enforced our small loan law against payday lenders operating illegal lending schemes, including Advance America and Cash America. But right now those same payday lenders are seeking to roll back Pennsylvania’s existing consumer protections.
As a result of its existing laws, Pennsylvania saves its citizens more than $200 million annually in money that would otherwise be paid in excessive payday loan fees.
Data from the Pew report also help separate fact from fiction regarding payday loans and the claims payday lenders have been making as they seek permission from legislators to bring their loans into Pennsylvania at rates over 300 percent annually.
Key findings:
• Payday lenders market their product as a quick financial fix to cover an unexpected expense, but most borrowers use the loan for regular, ongoing expenses and become trapped in debt for over 5 months of the year.
• The absence of storefront payday lending does not drive borrowers to seek payday loans online or elsewhere.
• Pennsylvania already has one of the strongest laws in the country that successfully curb abusive payday lending usage.
• Borrowers report having options other than payday loans to manage their financial needs.
