Consumer Advocates Fight Payday Loans, But California Bill Says Go Bigger

NEW YORK (sbup) – Payday loans are a sad fact of life for struggling consumers, who spend $7.4 billion annually on the high-interest loans, according to the Pew Charitable Trusts.

The group says that 5.5% of all U.S adults have taken a payday loan since 2007. That’s about 12 million Americans, Pew says.

“State regulatory data show that borrowers take out eight payday loans a year, spending about $520 on interest with an average loan size of $375,” Pew notes.

That interest — $520 — is roughly the size of half a mortgage payment on a decent-size home, or the equivalent of a high-end monthly car payment.

But some states are making it easier for payday lenders to do business with consumers, and that has consumer advocacy groups worried.

The most recent case in point is California, where the Los Angeles Times reports that the state legislature is considering a bill, officially called AB 1158, that would raise the maximum amount of a payday loan to $500 from $300. The thinking is that after a 15% loan fee by the lender, a $300 loan turns into $255 – not a lot of money, bill advocates say.

As one commentator on the legislature’s Web page puts it, “I can't do a damn thing with $255.”

But, as the Times notes, burying consumers under even more debt isn’t a great idea.

“The problem with these loans, beyond their extraordinarily high interest rate (more than 400% in annual terms), is that the short repayment period doesn't allow borrowers to spread the cost over time,” the paper says in an editorial. “As a result, some borrowers find themselves taking out loan after loan after loan, caught in a debt trap they can't escape.”

The paper also points out that consumer groups such as Consumers Union and the Western Center on Law and Poverty say bill sponsors should add a six-loan limit, a longer repayment timetable and a mandatory review of a borrower’s financial situation before enacting any laws that raise the cap on payday loans.

Consumer groups say would-be borrowers should be exceedingly careful before signing off on any high-interest loans.

Job one is to review why you’re taking the loan in the first place. Do you need the loan for an unexpected financial burden, such as a health care issue? Or are you using the loan to pay your phone or utility bill (a big “no-no”, consumer groups say, because the loan interest only adds to your debt burden).

Also look well at the loan repayment rate: Can you afford to pay the loan? Would a credit card, which has a more affordable interest rate (of about 15%), be a better deal?

While California mulls over its payday loan landscape, consumers need to stay on guard. A big payday loan can really put you in a financial hole – one that you’ll struggle to dig out of.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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