by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor, John Locke Foundation
• A 1997 bill that exempted “payday lenders” from state usury laws was allowed to sunset in 2001, and the last storefront lenders were shut down in 2005.
• About 5 percent of North Carolinians still take out high-cost, short-term and payday loans, either crossing state lines or going online.
• Critics view the loans as preying on poor borrowers and giving them exorbitant rates that leave them needing subsequent loans (“debt trap”). They project the effective annual percentage rate (APR) of the typical loan to be near 400 percent.
• The high cost owes to two unique aspects of the loans: high-risk clientele and small sums lent for short periods of time. Fees are essentially break-even prices counting default rates, and the industry is not that profitable.
• Payday borrowers dislike the loans’ high costs, but they like several nonmonetary aspects: no credit risk, convenient hours and locations, ease, friendliness, discretion, and lack of embarrassing interactions with people.
• Getting rid of payday lending in North Carolina left consumers worse off, research by the Federal Reserve Bank found. The ban led to more bounced checks, more complaints about lenders and debt collectors, and more filings for Chapter 7 (“no asset”) bankruptcy than there would have been had payday lending been allowed.
• In other words, payday borrowers were making rational decisions. Research consistently finds that borrowers clearly understand the costs of the loans and that about 95 percent are repaid.
• Bounced-check fees carry effective APRs of from 704 percent with overdraft protection to 3,520 percent without; utility disconnect or reconnect fees, 240–420 percent; credit card late payments, 965 percent; borrowing from an online payday lender, 650–780 percent; and borrowing from a loan shark, indeterminate.
• High-cost, short-term loans are hardly a solution of first resort to a shortfall. Nevertheless, poor families often find themselves faced with a sudden need and few ways to navigate it.
• Taking away choices doesn’t help them, especially not by removing costly options and leaving them with costlier ones.
• North Carolina policymakers should expand lending options in this state by legalizing small-scale, short-term and payday lending again.