Controlling the Payday Sharks

More than 1,500 “payday lenders” have opened shop in California since a 1997 state law let them charge annual interest rates of up to 800% on small, short-term loans. Payday lenders--who loan to people with steady jobs who run short before the paycheck comes--say they help working people deal with their debts. Far more often they trap borrowers on treadmills of debt. The industry’s own studies indicate that the average customer takes out 11 payday loans a year.

That’s why legislators should pass a bill that would take the bite out of these loan-shark rates. That bill would cap rates at 36%, the same top rate charged by other non-bank lenders like Household Finance and Avco, which are regulated by the state Department of Corporations.

The California Check Cashers Assn. is mustering powerful lobbying pressure to defeat the legislation, by Sen. Don Perata (D-Alameda). There is nothing magic about 36%, of course, but whatever cap is finally settled on, the figure should be far lower than 800% on an annual basis. Even if a much lower rate were to discourage some lenders from offering very high-risk loans to people trapped in debt, that is probably not a bad thing.

People in financial straits are much better off going to nonprofit financial advisors like the Consumer Credit Counseling Service, which has offices throughout California in which counselors help debtors consolidate bills and keep creditors at bay. Lenders like credit unions are now allowed to make small, low-interest loans to a broad array of people in their communities. Consumers should know that there are alternatives to payday loans.