February 22, 2006

Stop Payday Lending’s Vicious Debt Cycle

Issue: Everyone in our state regardless of their income has the right to fair and reasonable consumer protections when they borrow money. However, Washington law allows payday lenders to engage in loan practices that trap people in deep debt. Payday lending is illegal in 15 states.

Background: A responsible government is accountable, collects taxes fairly, and ensures the well-being of its people. But today in Washington, our tax system is not accountable, is not fair, and does not provide enough revenue to address the needs of residents. Our state law also fails to protect Washington consumers from predatory lending practices.

Washington’s law allows payday lenders to:

Charge triple and quadruple annual percentage rates of interest.

In 2003, nearly three million payday loans were made in Washington state. That’s nearly one and a half for every state resident over age 16. Payday or cash advance lenders charge exorbitant fees on short-term loans that result in incredibly high annualized percentage rates (APR). A typical such loan in Washington has an APR of 391 percent, with some as high as 1,825 percent.

Loan money without considering the borrower’s ability to repay.

These fast-cash loans trap people living paycheck-to-paycheck in serious debt. Once borrowers take out a loan, they have a short time to pay it back and are charged additional fees if they cannot pay up quickly. The typical loan is for 14 days only, but some loans are for as little as three days. When a borrower cannot pay, they often end up taking out multiple back-to-back loan transactions in order to pay fees to the payday lender, resulting in greater and greater debt.

Issue loans back-to-back, charging people more fees to pay off previous loans.

Charging high fees on short-term loans to people living paycheck to paycheck is big business for payday lenders. In fact, the payday business has grown by more than 84 percent in Washington in the last three years. In 2003, payday lenders indebted Washington residents by $1 billion and made over $150 million in profits off loan fees. The industry reaps the bulk of its profits from people who are caught in debt. In fact, 91 percent of the payday loans made in Washington state are to borrowers who take out five or more loans per year.

As a result, many Washington residents living paycheck to paycheck are getting caught in a never-ending cycle of debt that prevents them from meeting their basic needs and keeps them from getting ahead.

Action: Washington state must not allow people with lower incomes to be the targets of lending practices that trap them in debt. State lawmakers should pass legislation to stop payday lenders from gouging their customers. Lenders need new rules: they should be required to offer lower rates, longer loan periods, and fair repayment plans. Urge your state lawmakers to pass fair and reasonable consumer protections on payday lending.

Contact your legislators at 1-800-562-6000. For more information on this issue or to use an online form to send a simple letter to the editor of your local paper, contact the Statewide Poverty Action Network at www.povertyaction.org.