Newspaper article The Topeka Capital-Journal

Editorial: Payday Lending Should Be Restricted

Newspaper article The Topeka Capital-Journal

Editorial: Payday Lending Should Be Restricted

Article excerpt

The average federal student loan carries an interest rate of around 5 percent. When you take out a loan for a car, you can expect to pay between 3 percent and 10 percent. The average interest rate for a credit card is a little more than 15 percent. But if you get a payday loan in Kansas, you'll be slapped with an interest rate of 391 percent. Alex Horowitz is a consumer finance researcher with the Pew Charitable Trusts, and he explains just how bad this deal is: "So in dollar terms, somebody who borrows $300 and has it out for five months of the year would repay a total of about $750 to borrow that $300."

It isn't difficult to see how incapacitating this massive burden is for people whose financial situation was desperate enough to require a payday loan in the first place. What's worse, they often become dependent on the loans -- two-thirds of payday borrowers in the U.S. take out seven or more loans per year, and 69 percent use the money to pay for recurring expenses (such as bills, food, gas, etc.). Because they typically have bad credit, this traps them in a cycle of extremely high-interest debt. More than 12 million Americans spend $30 billion every year on payday loans, and many of them either default or take out other loans to cover what they owe.

According to the Pew Charitable Trusts, payday borrowers are disproportionately likely to be low-income African Americans with lower average levels of education. Borrowers are 62 percent more likely to earn less than $40,000 per year, 82 percent more likely to have lower than a four-year degree and 105 percent more likely to be African American.

A special legislative committee recently squandered a chance to recommend restrictions on payday lending in Kansas. It decided not to take action on a bill that would have limited the annual interest rate on payday loans to 36 percent, ensured that borrowers could only have one outstanding loan of $500 or less, and prevented lenders from charging a monthly fee of more than 5 percent of the loan's principal. …

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