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Help in a financial crisis

State reins in payday loans

But high-cost debt still a financial threat

[January 6, 2010]

The state of Washington has adopted new regulations for payday lenders, whose high-cost, short-term loans can trap borrowers in an ever-escalating spiral of debt.

Already there have been media reports of some payday lenders closing doors in Washington as a result of the regulations that took effect January 1. Among other things, those regulations place new limits on the size and frequency of loans an individual can receive from payday lenders, and require lenders to provide installment repayment plans with no additional fees.

The new rules also establish a statewide database to track every payday loan.

The changes should help keep some Washington borrowers out of trouble, notes Jamie Dedmon, an STCU business development officer. But the new regulations will not protect anyone who obtains payday loans via the Internet or in Idaho, says Dedmon, who hosts workshops for employers about the dangers of payday loans, along with other financial topics.

And a consumer still can be charged as much as $75 on a $700 short-term loan in Washington, amounting to an annual percentage rate of 391 percent.

Idaho places no limits on the fees charged by payday lenders, with typical fees ranging from $16.50 to $25 for every $100 borrowed, according to the Idaho Department of Finance. That amounts to 430 percent to 650 percent APR.

Dedmon says she often hears from consumers who take out a payday loan to make ends meet, then take out another to pay off the first, incurring an ever-increasing financial burden.

"A better solution," she says, "is to talk first with STCU, where a credit card or signature loan is far less costly." (More alternatives here.)

Financial meth

Research indicates that many people turn to payday loans when they are a few hundred dollars short. With no emergency fund in place, they seek a payday loan to cover the cost of an unexpected car repair, medical bill, or rent check.

Typically, the consumer writes a post-dated personal check for the loan amount, plus fees. The consumer either instructs the lender to cash the check at the end of the lending period or they return to the payday lender with cash to make good on the loan.

Because many borrowers are struggling financially, they do not have means to make good on the loan. So, they end up borrowing more funds, resulting in still more fees.

The typical borrower pays $793 in one year to borrow $325 from a payday loan store, says Spokane consumer advocate Doreen Kelsey, who often works with STCU. More than half of all payday borrowers are trapped in a cycle of loan after loan, never able to get ahead.

"Payday loans are financial meth," Kelsey says.

More states adopting regulations

In 2000, there were 377 payday lending locations in the state, according to the Washington State Department of Financial Institutions. By 2008, DFI reports, that had grown by 90 percent to nearly 700 locations making $1.3 billion in loans.

In response to similar trends, several states have limited the amount payday lenders can charge, according to the non-profit Consumer Federation of America. Georgia takes things ever further, prosecuting payday lenders under laws prohibiting racketeering. Arkansas courts consider payday loans a violation of the state’s constitutional usury cap.

Concerned that Americans serving in the armed forces were being preyed upon, the federal government in 2007 placed a 36 percent cap on the annual percentage rate for loans made to military personnel. That prompted most payday lenders in Washington to cease lending to servicemen and women.

Alternatives

Payday loans aren't necessary for most people. There are many alternatives, as the box below shows.

STCU First5 Savings Accounts are a good tool for establishing emergency accounts. Your first $500 earns the highest rate of any STCU account, so your money grows fast while keeping yourself protected from ever needing to seek "help" from a payday lender.

STCU members have free access to Balance, a program that can help you avoid financial distress, set financial goals, and manage debt. Contact a Balance counselor at (888) 456-2227.

And members facing serious financial challenges should immediately contact STCU's Financial Relief Solutions, a free service that can help you restructure loans to reduce monthly payments and take other steps to get by. FRS is the right call if you are: 1) Losing your source of income; 2) Facing foreclosure on your home loan or risk losing your car to repossession; 3) Are unable to pay monthly bills; or 4) Face unexpected bills you cannot pay.

For more information about FRS or any STCU service, call us at (509) 326-1954, (208) 619-4000, or toll free at (800) 858-3750. You can also visit any of our 14 convenient branch locations or chat online during regular business hours with an STCU Member Service Representative.