High-interest loans trap people in debt
Not having money to pay for a car repair or a utility bill is a distressing plight. To help remedy this predicament, payday advance and title loan companies have money to lend. These businesses are popping up around every corner with over 1,100 in Tennessee and close to a dozen in Warren County.
According to the Center for Responsible Lending, payday advance and title loan businesses have experienced explosive growth over the last decade. What was an almost non-existent industry 10 years ago now produces $3.4 billion annually thanks to some 5 million Americans who use such services.
If marketing slogans are to be believed, payday advance and title loan companies provide financial assistance to people and families at a time of need. They provide quick cash when an unexpected emergency arises.
Unfortunately, statistics show these businesses don’t provide one-time assistance during a time of need. Over 90 percent of the time, borrowers become trapped in a cycle of repeated transactions where they incur high fees every two weeks.
The Center for Responsible Lending reports the average borrower takes between eight and 13 loans a year, and 91 percent of all borrowers take at least five payday advances a year.
In reality, borrowers are being plunged into chronic debt more than they are being aided by helpful lending.
A person who borrows $200 from a payday advance company, for example, will be required to pay a $30 fee in two weeks. That translates into 391 percent interest. After two weeks, if that customer doesn’t have the $200, they can extend the loan for another $30. What it commonly amounts to is an extra $30 expense every two weeks and the borrower never makes a dent in the principal.
Title loan companies use the same mode of operation. A customer can borrow up to $2,500 on their vehicle, but are required to pay back $3,050 in no more than one month. If the customer doesn’t have the $3,050, they can just pay the interest, which amounts to $550.
This process can last indefinitely. After just five months of $550 payments, the borrower has already exceeded paying back the initial $2,500 loan without touching the principal.
Such high fees do nothing but prey on the poor during times of desperation. The exorbitant rates only perpetuate debt for families already struggling to make ends meet.
Over half the states have adopted measures to cap the fees these businesses charge. The Tennessee General Assembly has formed a Predatory Lending Study Committee of its own and considered such matters, although no action has been taken.
It can be said politicians can’t legislate common sense. They can’t make people spend within their means and avoid getting in over their head.
But lawmakers can regulate the fees charged by title loan and payday advance businesses to inch these fees somewhat closer to traditional interest rates. Tennessee lawmakers have been smart to study the situation. Now they need to go one step further and do something about it.