Support bill to restrict payday loans

Representative Ted James (D-Baton Rouge) and Senator Ben Nevers (D-Bogalusa) are sponsoring legislation that cap annual percentage rate (APR) at 36 percent on payday loans. This legislation offers Louisi­ana an historic opportunity to stand on the side of the working poor and the most vulnerable in our state.

Payday loans in Louisiana are structured with a single payment of the amount borrowed plus fees, timed to coincide with the borrower’s next payday or receipt of other income. If a borrower cannot repay within this period—typically two weeks—the lender initiates repayment by presenting the borrower’s personal check or by making a pre-aut­horized electronic debit from the borrower’s deposit account.

The cost of a payday loan is typically expressed by payday storefronts as a dollar fee that ranges from $10 to $20 per $100. At first glance, this may appear to be a feasible price. The problem of expressing fees this way, of course, is that it hides the true cost of the loan to consumers. The fee does not represent the actual total costs the customer pays and the equivalent annual percentage rate—the universal figure used to represent the true cost of credit on every other type of loan.

In fact, for example, if a consumer borrows $350 in Louisiana, the lender can charge 16.75 percent on the face value of the check up to $45 plus a $10 documentation fee. In this example, this borrower can only be charged $45.00 for the loan plus the $10 documentation fee for a total $55 loan cost.

Put in terms of the annual percentage rate (APR), the borrower is paying an annual percentage rate of 408 percent. Annual percentage rate is calculated by the loan cost ($55), divided by the loan amount ($350), times the loan terms per year (26 for payday loan due in two weeks). So the APR on this loan is (55 divided by 350) times 26, which equals 408 percent.

As the Consumer Protection Financial Bureau and the Pew Center have shown, over 90 percent of payday loan borrowers take out between five to eight loans per year. In Louisiana, a typical borrower will need to take out nine payday loans to pay off their original debt, resulting in $270 in fees for a one-time $100 loan. Most borrowers end up in a cycle of debt that exacerbates their vulnerable financial position.

Contrary to the industry’s insinuation that everybody uses payday loans, 68 percent of all payday borrowers have annual income below $30,000. The product is geared toward the most economically vulnerable communities. The Louisiana Budget Project has shown that the payday loan industry drained $46 million from the Louisiana economy and resulted in a 671 net job loss in 2011.

– Alexander Mikulich, Ph.D.

This article originally published in the March 24, 2014 print edition of The Louisiana Weekly newspaper.