Posts from: December 2013

New Data Show More Kentuckians were stuck in the debt trap for longer periods of time in 2012 than in 2011

The payday lending debt trap has gotten deeper. More Kentuckians were stuck in payday loans for even longer periods of time in 2012 than they were in 2011. The number of families trapped by payday loans is growing as well, according to new analysis of data from the Department of Financial Institutions (DFI) and analyzed by the Applied Research and Education Center as an outreach service of Indiana University Southeast. Well over 90 percent (93.3 percent) of payday lending transactions go to borrowers with five or more loans. In 2012, Kentuckians paid $117.9 million in fees for payday lending services.  In 2012, over 400 additional borrowers had 30 or more loans bringing the total to 5,282 people trapped for at least 420 days each in these 14 day loans.  (Click here for accompanying fact sheet).

Last week the Banking and Insurance Committee received a report from DFI on payday lending data. The DFI report fails to tell the real story about payday loan usage in Kentucky. Their report only outlines how many loans the average borrower had at any one time. Lacking in the DFI report is any data on how many loans per year the average borrower takes out, and how long it takes the average family to get out of debt. Families often end up paying off one loan and immediately taking out another, which is how Kentucky families end up in the debt trap.

“We hope legislators on that committee will take a hard look at the numbers in the report. Payday loans trap struggling families on a treadmill of debt that can lead to a host of negative consequences ranging from closed bank accounts to bankruptcy. These numbers are pretty astounding and illustrate the need to help families get out of the debt trap,” said Katie Carter, co-chair of the Kentucky Coalition for Responsible Lending.

The average days Kentuckians are indebted to payday lenders also increased: from 137 days in 2011 to 202 in 2012, showing that these loans keep families in debt much longer than they are advertised. Over the past decade, more than 20 states have put measures in place to make sure payday loans do not lead to an endless debt cycle that is currently prevalent in the Commonwealth. Kentucky has not taken needed steps to protect family stability and promote financial self-sufficiency.  Despite payday loans being marketed as a quick fix, Kentucky data show the opposite: that the typical borrower is stuck in payday loan debt for more than 200 days a year, and pays $562 in fees alone for $330 in loans.  Now is the time for legislators to put measures in place to protect hard-working families who are trying to make ends meet from getting trapped by payday loans.

“National trends indicate a desire to help families keep more of their hard earned money. Unfortunately, the Kentucky payday industry is growing by keeping the same people in greater debt,” said Lisa Gabbard, co-chair of the Kentucky Coalition for responsible lending. “Now is the time for legislators to take a hard look at protecting hard-working families by regulating this industry.”

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A Reporter’s Inside Look at the Confusing World of Online Payday Lending

National Public Radio (NPR) reporter Pam Fessler recently experienced firsthand the murky world of online payday lending. In the course of reporting a story, Fessler logged on to a site called eTaxLoan.com and completed an application for a $500 dollar loan. Despite using a false name, address, social security number, and bank account, Fessler was immediately pre-approved for a one week $750 loan. The fees and interest for the loan would amount to $225—an annual percentage rate of more than 1300%. Needless to say, Fessler did not approve of these terms and logged off the website.

Her story did not end with her decision to reject the loan offer. Whereas Fessler used a fake name and address, she did supply the site with a correct phone number. Within minutes of declining the loan, a representative of the lending company contacted her to offer a high-interest loan. Even after disclosing that she was reporter working on a story and not at all interested in obtaining a loan, the calls kept coming. For the next several months Fessler received dozens of calls letting her know that she had been approved for loans up to $5,000. Her efforts to find the companies behind these calls usually resulted in unreturned emails and disconnected phone numbers.

After a great deal of investigation, Fessler learned that sites like eTaxLoan.com are not themselves payday lenders. Rather, these sites operate as marketing firms directing potential consumers to lending companies for a fee. Once an application has been submitted, the consumer’s personal information can be sold to any number of payday lending providers, often leaving the consumer completely in the dark as to who they are dealing with. As BenJamin Lawsky, superintendent of financial services for New York, notes, “Because they’ll have front companies and shell companies and they’ll be in different states, you can never really get to the bottom of who is behind the marketing, the lead generating, and the lending itself.”

The buying and selling of consumers’ personal information is but one more example of the inherently predatory nature of the payday lending industry and affiliated businesses. Payday loans, whether made in a store or on a computer, are designed to trap individuals in a long term cycle of indebtedness. Policymakers must continue to take steps to rein in these abusive lending practices.

 

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