Payday lending: a debt trap

By Barrett Duke
Mar 21, 2013

The debt trap. Millions of Americans are caught up in it. It’s easy to get in debt and often very hard to get out. This is especially true if you live on the edge of poverty. People on the edge of poverty have very little room for an unexpected expense. So, what do they do when one inevitably occurs? Many turn to payday lenders. And in doing so, they often make their poverty worse.

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Here’s how it works. A payday lender offers to lend a single mother, say, $500 to help pay for an unexpected expense, like a car repair. He offers a simple deal—repay the loan in two weeks with 15% interest. In other words, when her next paycheck comes in. She can’t afford the loan and doesn’t know how she will repay it, but she needs her car to get to work, her children to daycare, and herself to college. “OK,” she says to herself, “I’ll figure it out in two weeks.” Two weeks come in a hurry, and suddenly she owes $565, the $500 loan plus 15% interest. That’s right, it’s not 15% annual interest. It’s 15% two-week interest.

She goes to the lender and explains her problem. He says, “No problem.” Just pay the interest due and he can extend the loan for two more weeks, at another 15% interest. What choice does she have? She pays the $65 and signs on for another two weeks. You see where this is heading, don’t you? Every two weeks, things are the same, and this woman is now paying out $130 a month on a $500 loan, with no end in sight.

In many states today, this is legal. These so-called businesses are charging an effective 390% annual interest rate, served up in two-week bites of 15%.

Now, many would say that the people who go to these lenders should know better. They should read the fine print more carefully and realize what the actual charges are going to be. They should know they won’t be able to pay back their loan in two weeks. I agree. But, hey, if you are drowning, and someone offers to throw you a rope if you just sign on the dotted line for a little bit of interest, you might accept the deal, too, only to regret it when it’s too late.

Just because people should know better doesn’t mean we should allow such clearly predatory practices to occur. I know, “buyer beware,” but we don’t live by that philosophy in most other areas of life. We have a Food and Drug Administration for a good reason. Unscrupulous people do exist and some will do anything they can to make a few more dollars. I’m glad someone is watching and holding them accountable.

But right now, in many of our states, no one is watching these payday lenders. The result is that vulnerable people are being held captive and paying outrageous amounts of interest on very small loans. Some states have reined in these lenders. Some have capped annual interest rates at 36%. Even 36% is high, but it sure beats 390%. Let me encourage you to check your state’s laws governing payday loans. If your state hasn’t done anything to rein these people in, I hope you will contact your elected officials and demand that they do something to help protect vulnerable people in your communities.

Proverb 22:7 states, “The rich rules over the poor, And the borrower becomes the lender’s slave.” It’s hard to imagine an instance where this is not more true than with predatory payday lenders. Let’s join together and force them to offer their loans to people who need them in a way that treats them with dignity and not simply as an easy mark for ill-gotten profits.

Listen to the audio of this commentary.

Dr. Barrett Duke is Vice President for Public Policy and Research for the Southern Baptist Ethics and Religious Liberty Commission, and also serves as Director of the Commission’s Research Institute of the ERLC. Read more of his work here. He is also a regular contributor to the For Faith and Family radio broadcast.

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