A Cycle of Predatory Lending

10 02 2009

In a time when unemployment is increasingly on the rise one industry is still managing to thrive. The business plan of payday lenders emphasizes the importance of encouraging clients to continue their cycle of debt through rollover extensions or back-to-back transactions loans. This allows the client to continue to pay fees without ever paying the principal owed. 91% of all payday loans are made to borrowers caught in a cycle of repeat borrowing with five or more payday loans a year. Over 40% of borrowers believe payday loan rates are less than 30% APR, when in fact payday loan rates are in Kentucky are 392% APR.


75% of payday loan clients believe “the government should limit the fees charged by payday advance companies”. 72% of their clients believe “the government should limit the interest rates that lenders can charge, even if it means that fewer consumers will be able to get credit”.


The Department of Defense conducted a study on how payday lending puts members of the military at risk of losing security clearance and furthering their debt. The Department of Defense called on Congress to enact protective measures that call for a 36-percent cap on annual interest rates for loans made to military personnel. The bill passed in October 2006 and became effective October 1, 2007.


Eleven states have placed caps on annual interest rates for payday lenders. In those eleven states, households in need of short-term credit turn to responsible credit options rather than triple-digit interest rate payday loans, saving a collective $1.4 billion in predatory fees each year.


The North Carolina State Employees Credit Union now offers payday loans of up to $500 for an annual interest rate of 12% and requires that 5% of the amount loaned be placed into a “salary advance” savings account. Once the funds from the savings account have been withdrawn an individual must wait six months before taking out another payday loan.


Because of this problem in Kentucky, the Coalition for Responsible Lending was formed to address this issue. The group is pushing for a bill that would limit the interest rates that payday lenders can charge to 36% interest. The coalition members include AARP, Community Action Kentucky, Homeless and Housing Coalition of Kentucky, Kentucky Domestic Violence Association, Kentucky Equal Justice, and Kentucky Youth Advocates. Many more groups are looking at this and are considering signing on to the legislation.


This past November had big victories for states seeking to reduce the interest rates that check cashing businesses. In Ohio, the check cashing businesses managed to get the issue on the ballot even though the Ohio legislature had already passed limits on the industry. The industry outspent the advocates 60 to 1, but the voters upheld the limits on the industry with 65% of the vote. The state of Arizona voters also voted to regulate check cashing businesses and to reduce the interest rate they would charge. The Arkansas Supreme Court ruled that the industry couldn’t charge more than 17%. West Virginia has outlawed the industry and North Carolina reduced the interest that could be charged and the industry basically left the state. The fact that three states in such close proximity to Kentucky have acted shows that the need to act is real.


We recognize that time is short during this session but this is a no cost measure that can be real boon to the citizens of Kentucky during a very down economic time for the state. We appreciate your support and consideration. 


Quantifying the Economic Cost of Predatory Payday Lending, Center for Responsible Lending, December 18, 2003, p. 1.

Payday Advance Credit in America, Gregory Elliehousen and Edward C. Lawrence, Credit Research Center, April 2001, (Georgetown Study), p. 35.

Payday Advance Credit in America, Gregory Elliehousen and Edward C. Lawrence, Credit Research Center, April 2001, (Georgetown Study), p. 34.

“Report on Predatory Lending Practices Directed at members of the Armed Forces and Their Dependents”, Department of Defense, August 9, 2006, p. 7.

The Payment Plan Smokescreen, Center for Responsible Lending, June 4, 2007, p. 3.

Credit unions consider cut-rate payday loans, Lee Davidson, Copyright 2005. Deseret News Publishing Co.




One response

24 03 2009

Hey I just want to introduce myself to everyone. My name is Kenneth.
This is a great board I have checked in from time to time and I think Im ready to participate and contribute with you guys.
I thought about starting my own board but Im glad I found this one instead. Great Info!

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