Utah’s high-interest payday loan companies say the pandemic is hurting their already-struggling industry — where nearly one in three stores have closed during a four-year slump amid… tighter regulations. Critics say government coronavirus aid may have reduced the need for such loans.
As the surviving loan shops try to hold on, they have hiked their already astronomical rates — from an average annual rate of 523% a year ago to 554%, according to a new state report. (It’s also 20% higher than the 459% average they were charging four years ago when their crisis started).
At this new average rate, borrowing $100 for just one week costs $10.63.
If a borrower pays that back in 10 weeks — the limited amount of time that Utah law allows lenders to charge such high interest on short-term loans — the interest would cost more than the original amount borrowed ($106.30 vs. $100).
Some of the loans in Utah cost way more than average.
The highest rate charged by a Utah payday lender in the last fiscal year was 1,669% APR, or $32 per week on a $100 loan. Interest for 10 weeks at this rate would cost more than three times the amount borrowed ($320 versus $100).
In short, buyer beware.
Payday lenders close
Among the many reforms passed by lawmakers in recent years, the Utah Department of Financial Institutions was required to track and report certain basic information about high-interest lenders annually, including average rates charged and lowest rates. highest and lowest found. It also tracks the number of high interest lenders in the state.
For the 2019-20 fiscal year that ended June 30, the state reported 382 payday loan stores operating in Utah, down 8% from the previous year and down from 31% over a four-year period.
“Several national companies have closed sites, either through consolidation or due to lack of profitability. This could be attributed to the highly competitive and regulated market in which we operate,” especially since Utah has tightened regulations in recent years, said Wendy Gibson, spokesperson for the Utah Consumer Lending Association of the industry.
She adds that the pandemic has hurt.
“The recent pandemic and its impact on the economy has significantly affected lending volume in the payday lending industry locally and nationally,” Gibson said. “As a result, we issued fewer loans and smaller loan amounts.”
Bill Tibbitts, director of the Coalition of Faith Communities, a critic of such loans because he says they hurt the poor, speculates that one of the reasons demand for loans is down is because of the stimulus generous and higher unemployment checks that the government has provided during the pandemic.
“How many people used their stimulus payments to pay off their payday loans?” he asked, adding that government assistance may also have helped some potential customers avoid loans in the first place.
Rep. Brad Daw, R-Orem – who signed into law a series of reforms last year against payday loans but was defeated for re-election this year – says the tightening of rules may also have forced some of what he says are the worst actors in the industry.
“My experience made me believe that a lot of little guys were some of the most abusive lenders. They are the ones going bankrupt,” he said. “The bigger guys, they start getting enough scrutiny that they start behaving a bit more.”
Most payday loans are for two weeks or until the borrower’s next payday. Reformed Utah law now allows them to be renewed for up to 10 weeks, after which no further interest can be charged.
Among other recent reforms in Utah, there has been an outright ban on using new loans to pay off old ones (though critics say this still happens under pressure from lenders); establish the right of borrowers to terminate loans quickly and free of charge; and the requirement for lenders to make available a long-term, interest-free repayment program (instead of simply suing for non-payment, which incurs high penalties as well as attorney and court fees) .
This year, the legislature also outlawed a practice used by Loans for Less that put some of its borrowers in jail for failing to respond to a summons for nonpayment unless they could post hundreds of dollars in bail. (who then went to Loans for Less). Even the Payday Loans Industry Association has testified that this practice is so predatory that it should be banned.
Need more change?
A report by the Legislative Auditor General last year said the new regulations still do not prevent the chronic use of payday loans – which can serve as a “debt trap” where the poor may not escape the spiral of accrued interest without new loans to cover old or possibly file for bankruptcy.
Auditors reviewing state data found that 2,353 borrowers in Utah had each taken out more than 10 payday loans in a year. It revealed that a man took out 49 payday loans during the year and paid $2,854 in interest on an average loan balance of $812.
Still, Daw says “it’s a good trend” that state data shows more payday lenders are closing, making fewer loans for less money, and fewer borrowers are in default. But he and Tibbitts worry about interest rates now rising and what that may mean for the poor in these tough times.
The rate hike could be because lenders are missing out on some lucrative penalties, fees and other charges because fewer loans are in default, Daw said.
Tibbitts said: “We are in a recession because of the pandemic. And we hear that the rates are going up. This is concerning” for borrowers who are often low-income people.
Gibson of the Payday Lenders Association says that despite the state’s findings on higher interest rates, “we don’t know of any lenders that have adjusted prices higher during the pandemic. In fact, we know that many Utah lenders have been proactive in responding to customers directly impacted by the pandemic by reducing payments, delaying payments, or instituting special payment plans.
Still, Tibbitts said the higher rates found by the state make it harder for the poor to escape those loans. “The first rule is when you’re in a hole, stop digging. But taking out a payday loan always puts you in a deeper hole.
“Payday loans offer borrowers far better and less expensive options than bank overdrafts, late mortgage payments or utility disconnect fees,” she says. “If you bounced a check for $100 with an overdraft fee of $39, the APR would be calculated at 2,033.57%…. Our customers are smart; they do the math and choose the lesser option. expensive to take out a payday loan.
The head of a non-profit organization that helps people settle debts with their creditors disagrees.
Ellen Billie, executive director of the AAA Fair Credit Foundation, says that when new customers who have payday loans are asked how much interest they expect to pay on them, many will say 30% or 40% – not realizing that it is often more than 500%, despite signing disclosure forms containing this information.
Many of his clients report that they use payday loans because they feel they cannot qualify for other loans and because the payday lenders are friendly. Many borrowers say they need it to buy a car or repair one, to cover medical bills, or to pay rent or catch up on a mortgage.
“They think it’s their only choice. But there are other options,” Billie said. “If they come to us before they’ve taken out a payday loan and they can’t pay the rent or the mortgage, we have resources to put them in touch. There is rental assistance for emergencies.
She said some people take out payday loans to pay medical bills, when paying directly with a doctor or hospital would be much cheaper.
Payday loans should almost always be avoided, Billie said.
“I would never tell someone not to [to use one] to feed their children. If they have exhausted all possible resources, this may be the best solution for them. But we’ve never seen that. There are always resources with which we can help them.
Meanwhile, many states have banned or cracked down on payday loans. Voters in Nebraska, for example, just approved a campaign initiative to cap interest on loans at 36% APR.. Sixteen other states and the District of Columbia had previously implemented 36% interest limits.
Similar national legislation has been introduced in Congress. Also, Congress in 2006 capped all loans to active duty military at 36%.
Above Rate Caps, Arizona, Arkansas, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, New Mexico, Pennsylvania, Vermont, West Virginia completely ban these types of loansaccording to the Consumer Federation of America.