Rein In Payday Loans

The payday loan business, a fast-growing offshoot of the check-cashing industry, is trapping poor people in debt by advancing them money at annualized interest rates that average 485%.

This week state legislators plan to consider two bills restricting payday loans: a tough measure by state Sen. Don Perata (D-Alameda) that would effectively rein in the practice and a weak bill carried by Assemblyman Herb Wesson (D-Culver City) and supported by payday lenders that is a thinly disguised attempt to forestall needed reform.

Wesson’s bill acknowledges the central problem with payday loans: They lead customers who cannot pay off their balances to repeatedly roll them over, creating ever-growing mountains of interest, often more than the amount they originally borrowed. But Wesson would merely worsen the problem by increasing the maximum amount that payday debtors could borrow from the current $300 to $400.

The assemblyman claims his bill would reduce payday penury by halving the amount debtors could borrow on their fifth loan and by requiring that “information on credit counseling programs [be provided] in the check casher’s service area.� But that measure falls far short. Most borrowers are already trapped in debt by the time of their fifth loan.

The Perata legislation, by contrast, goes to the heart of the problem by prohibiting payday lenders from loaning borrowers more than 25% of their paychecks and by limiting to $12 the amount they could be charged on a $100 loan. That’s more than some other nonbank lenders like Avco and Household Finance charge. But the change has usefully undermined payday lenders’ arguments that the caps in the Perata bill would put them out of business, depriving working people of needed cash.

People in a financial jam are better off going to nonprofit financial advisors like the Consumer Credit Counseling Service, which has offices throughout California and counselors to help debtors consolidate bills and keep creditors at bay.

More than one-third of the nation’s 9,000 payday loan outfits are in California. That sounds like a good deal for business, but the customer should beware.