Editorial: Lower interest rates on payday loans

From the Appleton Post-Crescent (6/26/09)

People with poor credit who get behind on their bills and need a quick loan sometimes find a friend in payday lenders.

It sounds so easy — a loan to tide them over until payday with nothing down and no credit checks.

Only, these “friends” come with a steep price — an average of 525 percent interest in Wisconsin. That means if someone borrows $100, he’ll be expected to repay $120 in two weeks and, if he’s late, those interest charges keep ballooning.

Rep. Gordon Hintz, D-Oshkosh, proposed a bill that would cap the interest rate at 36 percent annually on consumer loans. So far, it has 43 co-sponsors in the Assembly and 15 in the Senate. The next step is a public hearing.

Though we’re unsure about the 36 percent figure, we encourage the Legislature to pass a cap and reduce the absurd interest rates. Wisconsin, by the way, is the only state in the country where there’s no rate cap for licensed lenders.

While Hintz acknowledges that this practice affects only a portion of consumers, it has a corrosive effect on economic security for low- to moderate-income residents and infiltrates the economy as a whole.

Critics of the proposal say it could result in the shutdown of all the payday loan centers in Wisconsin because these companies could not cover overhead costs with a cap. Without them, a spokesman for one payday loan company told the Associated Press, their customers will borrow from unscrupulous lenders who operate online.

But business that preys on the poor border on unscrupulous if there are no regulations in place.

Another alternative for the “unbanked,” which has been rolled out in several places, is for credit unions to give members in good standing a short-term loan at lower rates.

Hintz pointed to a credit union in Oshkosh that is partnering with UW-Extension to provide loans — provided the borrowers take a financial literacy course first and put at least 5 percent of the loan into a savings account.

Locally, Goodwill NCW is partnering with Prospera Credit Union on a nonprofit short-term loan program called GoodMoney, which also helps people get on a more solid financial footing.

Those are the types of models other communities should be exploring. A cap is needed, but can’t be set so low that non-profit programs can’t operate.

Meanwhile, for-profit payday lenders, which are still serving the majority of this population, need lower interest rates. Otherwise, they’re anything but the easy way out of debt.

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