A financial trap

Once again, the payday loan industry wins instead of the consumers

Payday loans are a trap that begins as emergency help to then become a debt that drags on, at an annual real interest rate of 460%.

That is why they are strictly regulated in 17 states and even forbidden for members of the armed forces. However, in California, the payday loan industry is flourishing thanks to the powerful influence that its lobbyists—and their contributions—have over the Senate Banking Committee chaired by Lou Correa (D-Santa Ana).

An example of this influence is the defeat in recent days before a legislative panel of a bill that would have decreased the disastrous impact these loans have on the poorest population. The bill mainly limited loans to no more than six loans a year per borrower.

That was an unacceptable amount for an industry that makes its money by renewing loans every two weeks with a fixed fee of $45 for every $300 borrowed. The business is based exactly on the larger amount of new loans that a person takes on to pay the debt that keeps piling up.

This is an industry that moves more than $3 billion per year and in 2011 served 1.6 million Californians who took out 12 million loans. This is a big business with well-protected interests in Sacramento, to the detriment of the poorest.

There are many ways to set up controls against abuse in these types of loans, like limiting the number of loans, putting a cap on the interest that can be charged, expanding the time to pay back and requiring the lender to make sure that the borrower’s debt does not surpass half of his or her gross monthly income.

This helps, but the solution is to have loan alternatives that low-income people can turn to without being eaten up by usury. For this to happen in California, we must wait until the state legislature prioritizes the interests of consumers instead of helping to jeopardize them.