By Michelle Singletary
The Washington Post
— If I said, "Don't rob Peter to pay Paul," you would probably understand that I was warning against making a desperate move to fix a financial problem that often makes a bad situation worse.
Yet millions of people do just that when they get a payday loan.
These are small loans that a borrower promises to repay with the next paycheck or benefit check.
Stop and think about this.
If you can't pay your expenses with your current paycheck, how is borrowing from the next one going to help? Yes, it may solve a problem today. But if you can't repay the loan, you're likely to create a long tether to a financial product with expensive fees.
Yet, I understand why people get them. It's quick cash. It's easy to get if you have a bank account and income. And if you're in a financial jam, the fees can seem reasonable. A charge of $15 to borrow $100 doesn't seem extreme or exploitive to borrowers trying to avoid having a service turned off or catch up on their rent or mortgage.
But when fees are annualized, they often amount to triple-digit interest rates or more. I've seen payday loan contracts with four-digit interest rates. Payday lenders are required to tell you the finance charge and the annual interest rate (the cost of the credit) on a yearly basis.
Defenders argue that these loans provide a service for people who need short-term cash. And they are right. Many people feel they are being rescued. Until things go wrong. And they do, for a lot of folks.
The Pew Charitable Trusts says the average loan size is $375, but most people can only afford to pay $50 in a two-week period after paying other regular expenses. "Repeat borrowing is the norm, because customers usually cannot afford to pay the loans off on payday and cover their other expenses, so they repeatedly pay fees to renew or reborrow," a 2013 report from Pew said. "Lenders depend on this repeat borrowing, because they would not earn enough revenue to stay in business if the average customer paid off the loan within a few weeks."
After examining data from more than 12 million loans in 30 states, the Consumer Financial Protection Bureau found that more than 80 percent of payday loans are rolled over or are followed by another loan within 14 days. Monthly borrowers are disproportionately likely to stay in debt for a whopping 11 months or longer.
The CFPB, which began supervision of payday lenders in 2012, focused in a new report on repeat payday loan borrowers. The agency noted that with a typical payday fee of 15 percent, consumers who took out a loan and then had six renewals paid more in fees than the original loan amount.
Think you can handle this type of loan?
I've counseled people who were stuck in a tormenting cycle of payday loans. One woman I was trying to help had a payday loan with an annualized interest rate of more than 1,000 percent. After several back-to-back loans, her debt obligation ate up most of her paycheck.
Although lots of payday business is done online, storefront lenders continue to operate in mostly low-income neighborhoods. Organizations and agencies that fight and advocate on behalf of consumers have long understood the implication of the payday loan trap, especially for the most financially vulnerable.
Because payday lenders collect their money using post-dated checks or by getting customers to give them electronic access to their bank account, they don't have to look at a borrower's ability to pay when compared to existing expenses or existing debt, says Tom Feltner, director of financial services for the Consumer Federation of America.
Last year, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. imposed tougher standards on banks that offer short-term, high-interest loans similar to storefront payday loans. The institutions have to determine a customer's ability to repay. And the same should be true for Internet and storefront payday operations.
"We have to make sure regardless of what channel a borrower uses to take out a payday loan, there needs to be strong ability-to-repay standards," Feltner said.
Come on, CFPB. Make a regulatory move. No payday loan should be made without assessing a person's ability to repay -- and repay without repeated borrowing.
Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her email address is email@example.com. Follow her on Twitter (@SingletaryM) or Facebook (www.facebook.com/MichelleSingletary). Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.