ImagiNation

Things I've Learned from the Federal Reserve part II

I'm guessing not everyone is hearing the buzz about the dangers of predatory lending, also known as Payday loans. Another wonderful speaker I had the pleasure of hearing spoke of an successful alternative to such practices, Eugene (Jack) F. Webb, President of the South Region of BankPlus. But first things first, why are Payday loans bad?

According to A Study of the Payday Loan Industry in Missouri, "in the past few years the payday loan industry...has grown significantly, both nationally and in Missouri. In 1996 there were an estimated 2,00 payday loan outlets nationally, and by 2008, that number grew to an estimated 22,000."

I recently attended a public hearing because in the state of Kentucky, because Kentuckians have paid upwards of 400 percent interest on more than four million loans for an estimated $158 million in predatory payday loan fees in 2008. Proponents if payday loans often state that they are useful as an occasional source of short term credit. The thing is many customers use these services multiple times in a year.

According to KCRL County Data Report, the U.S. Department of Defense recognized the problems associated with these loans and sought and won federal legislation capping the annual interest rate that can be charged to military families at 36 percent. This was defined as a matter of national security because payday loans were causing the disintegration of family finances and impairing military readiness. People feel that this should apply to everyone.

Payday loans are also known as deferred deposit transactions, allowing people to borrow money against future earnings, by writing a postdated check for the amount due. The problem lies in that many people just can't pay it all back because of the high interest rates. Basically the entire system relies on the consumer's failure to repay and result in repeat borrowing.

For example say your car broke down and because your hours were cut you do not have the money for the repairs at the moment, but you have to get the car fixed asap so not to miss any work. You decide to go to a payday lender for a $250.00 loan. It cost more than you had anticipated to fix your car and now your rent, credit card and phone bills are due. Unable to repay the loan you end up paying $54.00 in interest every two weeks. Let's say this continues, and 18 months later you pay off the loan. The total loan cost would be $1944 with $1695 in interest (452% APR).

So where are people turn when you don't have family or a saving account? The program offered at Mr. Webb's bank. At BankPlus you can get a $500 or $1000 loan based on your credit score with a fixed interest rate at 5% for 12 or 24 months. There is a required 3 hour financial literacy class and half of the proceeds go to pay down debt while the other half go into a savings account. There are no fees other than the interest rate. While the bank really doesn't make any profit initially it does create customers, ones that so far appear to stick around.

posted by imagine @ 1:55 PM