Seeking to protect their triple-digit interest rates here in Montana, payday lenders have a new argument for why voters should continue to allow them to charge exorbitant rates: “It’s only $75 per $300.” Certainly, this would be true, if a borrower were to take just one $300 loan, pay back $375 promptly in two weeks and continue on their way.
Unfortunately, this is not how payday lending operates across the country, including here in Montana.
In fact, taking out a payday loan and walking away completely paid off after two weeks is an experience that occurs only 2 percent of the time. The remaining 98 percent of loans go to borrowers who don’t have enough money to pay back a loan in full and pay other bills coming due during their pay period, so they are forced to repeatedly float the same $300 over and over. In total, over half of all payday loans go to Montana borrowers taking 13 or more a year — that’s more than one a month! It’s virtually never just a two-week loan.
Payday lenders like to argue that Montana’s so-called “renewal” ban prevents borrowers from getting trapped into the cycle of endless 400 percent payday loans. But the renewal ban was something made up by payday lender lawyers, and lenders have merely changed the way they “flip” borrowers from rollovers to “back-to-back” or “touch-’n’-go” loans.
So instead of having the borrower keep the same $300 loan outstanding by paying another $75 fee, the lender has the borrower pay off their initial loan with the proceeds of their paycheck (after all, it’s payday when the loan comes due) and then immediately take out a new $300 loan for a $75 fee. Trapped borrowers also take additional loans at other payday stores or use another borrower’s name from a joint checking account to originate a “new” loan.
Another so-called protection payday lenders like to tout is that they cannot lend more than 25 percent of a borrower’s monthly take home income. But let’s do some simple math: for a borrower making $25,000 annually, they qualify for about $500 — well over the actual loan cap of $300. In other words, it’s another empty concession from the payday lenders.
These types of “borrower safeguards” are something only a payday lender lobbyist or lawyer could love.
The simple truth is that borrowers living paycheck-to-paycheck facing a financial emergency cannot pay back a balloon loan that comes due in two weeks or less. Using data from the Federal Reserve and Montana Division of Banking, we estimated that Montana payday borrowers would only have $30 remaining for child care, car payments, any other debts (credit cards, student loans) after they “pay off” the typical payday loan.
Not surprisingly, they will be forced to re-borrow.
Finally, I-164 caps the interest rate on both payday loans and car title loans, but the opposition would rather not discuss the latter. Car title loans are an especially dangerous financial product. These loans can be renewed each month with an interest-only payment, so borrowers end up paying more in interest than the original principal in just a matter of months. With a $1,000 loan at 300 percent APR, a borrower can end up with $1,500 in interest payments over six months. And if the borrower fails to make the payment on the seventh month, the lender can take possession of the vehicle and sell it with no responsibility to pay the borrower the net proceeds from the sale. The high interest rate for these loans is especially outrageous, considering that the vehicle provides valuable collateral for the loan.
Montanans need responsible loans that can be paid off in installments over time, at reasonable interest rates, not 400 percent. Fortunately, affordable small-dollar loans are already offered across the state at other lenders, including Montana credit unions — Montana has one of the highest credit union membership rates in the country.
Don’t be fooled by the deceptive tactics of predatory lenders. Four hundred percent is too high; it’s time to cap the rate. Vote for I-164.
Linda Reed is president and CEO of the Montana Community Foundation. Uriah King is the vice president of state policy for the Center for Responsible Lending. Both are members of the coalition supporting I-164.