If you have made the difficult choice of getting a payday loan because funds were too low to make it until payday, then you know the high interest rate that’s attached to these short-term loans. When you decide to borrow a few hundred dollars because you’re short again due to the payday loan, you’ll find yourself in a vicious cycle of borrowing, paying back, and re-borrowing these easy-to-get payday loans.
Payday lending locations allow you to borrow a certain amount of money (usually a minimum of $100 and a maximum of $500), with the amount being contingent on your income. In order to get approved for a payday loan, you must present proof of income, a valid ID, proof of a checking account, and you must sign a contract stating you will pay back the loan by a certain date (or that money will be deducted from your checking account each month until the loan is paid). If you pay the loan in full on your next payday, you’re not required to pay back a huge amount of interest; however, if you simply make payments on your future paydays, the amount of interest you pay over time is astronomical.
States Take Action to Stop Payday Lending Practices
Over the past few years, some states have taken against payday lenders and their exorbitant interest rates, but just last week, California Governor Gavin Newsom signed into law legislation intended to “protect consumers from predatory lending practices that create debt traps for families already struggling financially.” AB 539 bars “payday lenders from charging high interest rates – sometimes as high as 200 percent – on loans between $2,500 and $10,000.” Governor Newsom had signed similar legislation barring payday lenders from predatory lending practices earlier this year.
According to an article on the CNBC website, in mid-September 2019, the “California State Legislature passed the Fair Access to Credit Act, which blocks lenders from charging more than 36% on consumer loans of $2,500 to $10,000.”
In late 2018, Colorado led the charge by passing Proposition 111, which took effect in February 2019; the proposition caps the annual interest rate on payday loans at 36% and eliminates other finance charges and fees. In the last couple of years, Colorado and 15 other states, including Washington, D.C. have had ballot initiatives to cap rates at 36% or less.
Vicious Cycle of Payday Loans
Studies done between 2000-2006 indicated that when someone borrowed $300 from a payday lender, the borrower would often end up paying back as much $800 after re-borrowing over and over, a practice referred to as loan churning.
Some borrowers have reported going to more than one payday lending place the same month in order to get funds to pay back a previous loan. Sadly, consumers may find themselves owing one, two, or even five or six payday loans. Most payday lending places are not aware that their customers already have a payday loan out with another lender, and even if they did know this information, would it even matter to them?
According to lendedu.com, every year, approximately 12 million Americans use payday loans to deal with financial problems from pay period to pay period, and those borrowers pay more than $9 billion in fees to get those funds. Why are so many people getting short-term loans? It’s estimated that about 58% of Americans cannot cover their monthly expenses, according to lendedu.com.