Clamp Down on Debt Treadmills

Two thousand payday loan shops have opened their doors in California since 1997 when the Legislature legitimized the industry--essentially legalizing loan sharks. The shops, which issue small short-term loans at interest rates of up to 900% a year, increasingly trap low-income Californians like Trudy Robideau on treadmills of debt. The San Diego resident wrote a $300 personal check that a payday lender agreed not to cash until her next payday, two weeks later. She walked out with the cash, minus a $45 fee, but could not pay the loan back in time. Soon she found herself owing 18 different payday lenders a total of $5,000, forcing her to pawn her car and sell her furniture.

Legislators cannot correct the bad management skills and personal shame that Robideau says led to her insolvency, but they can and should place restrictions on payday lending, a “poverty industry” currently exempted from state banking and usury laws. At risk is a whole generation of poor, working Americans whose woes are symbolized by a near tripling in personal bankruptcies since 1992 and by record levels of consumer debt.

As a first step, legislators should pass SB 898, a newly introduced bill by Sen. Don Perata (D-Alameda) that would reduce payday lending fees, permit payment plans for paying off loans and require payday lenders to protect consumer rights by following all the provisions of the state’s Consumer Finance Lenders Law.

Payday lenders say they are merely meeting the needs of the working poor whom traditional banks abandoned in the late 1990s when they sharply raised transaction and minimum-balance fees and closed offices in poor, urban areas.

However, the alternative that payday lenders offer is dependency, not financial freedom. The industry’s own studies indicate that since its average customer takes out 11 payday loans a year, the loans may only be deepening the financial rut of poor workers.

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--though too few--to payday loans.