May 22, 2008

No more payday loans?
Bill to put an end to quick money
By Alec O'Meara aomeara@hippopress.com

Barring a sudden, unexpected change of heart from Governor John Lynch, short term, so-called “payday loan” businesses in the state are on their way out the door by year’s end.

Categorized as predatory, unfair, and borderline addictive by opponents, the 60 or so short-term advance loan businesses in the state offer people quick cash. Often, customers use their car as collateral for the loans, which typically range from $100 to $500. The loans come along with what the lender calls a fee, which is actually the interest on the loan. Factor in the $20 or $30 dollar fees, and the annual percentage interest rate on the loans is around 520 percent in New Hampshire, said Jamie Fuller, director of public affairs for Advance America, a National Pay Day Loan corporation that manages 20 of the 60 loan offices in the state.

Or it used to be, anyway. On May 8, the House passed a bill that would cap the interest rate on loans at 36 percent annually. The bill has already passed the Senate, and Gov. Lynch has indicated that he will sign the bill into law. The rate cap would limit the charge payday loans could make on a two-week loan to less than two dollars, Fuller said.

“You can’t pay salaries and rent on 10 cents a day,” Fuller said. “We can’t stay around on that kind of wage.”

Advance America loan offices make up about a third of the payday loan businesses in the state. Fuller estimates that his business does about 160,000 short-term loans in the state each year.

Taking on high-interest-rate loans to make ends meet is bad economics 101, said David Fehr, associate professor of economics at Southern New Hampshire University. However, that doesn’t mean there isn’t a place for payday loans; at least it doesn’t on paper. Short-term loans expand the opportunity set for consumers, he said, and more opportunities traditionally equal more chances to make strong business decisions. But Fehr believes that when the overall impact of high rates isn’t entirely clear, or isn’t entirely understood by the person getting the loan, there might be a need for government to step in.

“It seems like in these cases, it’s not opportunity that is being taken, it is more an act of desperation,” he said.

Tom Birch, associate professor of economics at the University of New Hampshire at Manchester, suggested there was case law indicating that payday loans could possibly get thrown out if challenged in court.

“Contracts that are entered into with the people getting the loan [are] considered to be what is called ‘under dire circumstances.’ These contracts can violate those circumstances, if the situation is bad enough,” Birch said.

The argument against getting into such loans is easy to make, both Birch and Fehr said. Short-term loans can fast-forward the damage to your credit as you pay for this week’s expenses with next week’s check. Right out of the gate, the customer is behind on the following month’s expenses, and unless there’s an influx of money, the chances increase for the need of a payday loan the following week. There’s a reason the word “predatory” appears in the language of House Bill 267, the bill that seeks to cap interest rates.

“There aren’t many options available for some of these people,” Birch said.

The lack of options, however, is exactly why Senator Bob Clegg stood opposed when the Senate voted on the bill. Clegg said there was a pride factor involved for some users of these loans, people who want to make ends meet on their own and not look to outside or charitable services. Should payday loans no longer be available, Clegg thinks, some might turn to less-reputable sources to get quick cash, such as loan sharks or pawn shops. Clegg said it’s unfair to suggest that lower-income people don’t know the risk involved in short-term loans, and he believes there is a value to having the option available for one-time uses to get through a tough stretch.

Clegg paints a picture of someone who needs to choose between the high interest rate and a late fee for an electricity bill or a credit card. If the fee for a payday loan is lower than the bill’s late fee, he argues, why take that choice away?

“Payday loans serve a sector of the population that have nowhere else to go without them,” Clegg said. “Some of the people that oppose these loans, they can’t understand that there would be such a dilemma for some of these people.”

Fuller is unapologetic about his business, and says 95 percent of loans are paid back within a day of the due date, and total payback approaches 97 percent of loans made nationally. The high interest rates and fee structure are fully explained to customers, he said, and he feels using an annual rate analysis on loans only intended to last a couple of weeks isn’t in the best interest of the consumer.

“What people are ultimately looking for is how much they are going to pay for a product,” Fuller said. “We go to great lengths to educate our customers on our fee structure.”

Regardless, the argument in favor of payday loans appears to be falling on deaf ears. Colin Manning, press secretary for Gov. Lynch, said the governor intends to sign the bill, so on Jan. 1, the effective start date, payday loan agencies will be unable to buy any more time. As for the loss of options for those who may need quick cash, Lynch said he favors another bill that will create a study group to look into credit options for low-income family in the state.

Fuller estimated that ending payday loans in the state would cost approximately 200 jobs and approximately $8 million in salaries and benefits, saying there was no way for the businesses to survive at the rate cap the state is poised to install.

Birch suggests that the claim of woe is disingenuous. “There seem to be an awful lot of credit agencies in the state that don’t need 500-percent interest rates to survive,” he said.