Scranton Times-Tribune Op-ed: Payday Lending: Smoke, Mirrors and Debt

Mark Price
Scranton Times-Tribune
July 5, 2013

This op-ed by Mark Price, Labor Economist for the Keystone Research Center, was originally published in the July 5, 2013 edition of the Scranton Times-Tribune.

There is a movement afoot to weaken consumer protection laws that have long kept predatory payday lenders out of Pennsylvania.

Lenders are working hard to turn the law back so that they can open storefronts from Scranton to Pittsburgh.

The effort is an unfortunate sequel to a failed attempt last year to legalize predatory payday lending. A bipartisan group of senators refused to support it after hearing the concerns of a broad coalition that included pastors, seniors, consumer advocates, and military veterans.

Payday loans are small-dollar loans that typically come with triple-digit annual interest rates. Loan payments are timed to a borrower's next payday with a post-dated check or direct access to the borrower's bank account.

Loans are marketed as a quick financial fix but the typical borrower is in debt for the long haul. A Pew Charitable Trusts report finds that payday loans "usually prove unaffordable, leaving borrowers in debt for an average of five months." Pew and the Department of Defense credit Pennsylvania for having among the strongest laws against these kinds of destructive products.

With unemployment high and wage growth muted, the industry has salivated over the potential profits that could come from opening thousands of storefronts. The industry managed to win a narrow Senate committee vote on their latest plan.

Senate Bill 975 is not that much different than last session's legislation. It unravels critical consumer protection laws and allows loans that carry fees equal to an annual interest rate of more than 300 percent. There would be no assessment of a borrower's ability to repay without re-borrowing, and borrowers would be permitted to take out loan after loan, trapping them in a cycle of debt.

High fees and long-term debt are key to payday lender profitability. To paraphrase Tennessee Ernie Ford: You borrow over and over, and what do you get? Another day older and deeper in debt.

Lenders are retooling. They started out calling their new products "micro loans." That failed to win many friends, so they are now strategizing to come up with another name.

Payday lenders rely on a business model that offers up seemingly easy solutions but end up plunging working people into a debt spiral that's hard to escape. Someone who starts out short on one bill and takes out a loan quickly finds the interest and fees too much. So they borrow again and again. Before long, bankruptcy is the only option.

Payday lending saps the vitality of local economies. When people who use these products spend more on fees, they spend less at local businesses.

Pennsylvanians need to see past the smoke and mirrors.