'Short-term' loans are a long-term headache

Herb Weisbaum • Profile • E-mail

It will soon be hard – some predict impossible – to get a payday loan in Ohio.

Next week, Governor Ted Strickland is expected to sign legislation that caps the allowable interest on a payday loan at 28 percent. Right now in Ohio, the going interest rate for these short-term loans is 391 percent. The new law also limits a payday loan to $500 and requires the loan to be at least 31 days instead of two weeks.

The Community Financial Services Association, which represents a majority of the payday loan companies in the country, says the rate cap will force the 1,600 stores in Ohio to close. “They would lose money on every loan,” says CFSA spokesperson Lyndsey Medsker.

Medsker criticizes lawmakers in Ohio for not listening to their constituents when they passed this bill. “People like the service; they appreciate the service,” she says.

Not everyone. Gail Meyers of Columbus, who calls herself “a victim of payday lending,” told lawmakers what happened when she borrowed $300. Two weeks later, after paying back the loan plus $45 interest, she took out another payday loan to pay her bills.

“Before I knew it, what I thought was a ‘short term solution’ became a two-year financial nightmare,” she testified.

Because she could not repay the loan after two weeks, Meyers continued to get loan after loan for two years. Her $300 payday loan ended up costing her $2,640. In her testimony, Meyers called payday lenders “legalized loan sharks who need to be regulated.”

Bill Faith won’t shed a tear when payday lenders pull out of the state. “Our view is good riddance,” says Faith, executive director of the Coalition on Homelessness and Housing in Ohio. “I think for most consumers who use payday loans, the absence of payday loans will save them a lot of heartache and money in the long run.”

Fact vs. fiction
The Community Services Financial Association says typical customers use a payday advance (they don’t call them loans) to cover small, unexpected expenses between paychecks. Given the options of bounced check fees or late payment penalties, the association says, it’s a smart choice.

But is it? “The industry’s model is to trap people in a cycle of debt,” Faith says. “That’s where their profitability is. That is where the bulk of their loans are made; to people who are getting loan after loan after loan.”

According to a December 2007 report from the Center for Responsible Lending, the vast majority of families taking out payday loans are ensnared in long-term debt, “making them worse off than they would be without high-cost payday lending.” The study found that more than 60 percent of payday loans go to borrowers with 12 or more transactions a year.

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