Issue: In 2005, over 3.5 million payday loans were made in Washington State — that’s about 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 interest rates, typically 391 percent APR. House Bill 1020 would stop predatory payday loans by capping interest rates at 36 percent. Last year, Congress capped interest rates that payday lenders could charge military families at 36 percent. It’s only fair that other working families have the same protections.

Background: 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 only 14 days, but some loans are for as little as three. Payday lenders target these debt-trapping loans in African American and military communities. According to a study conducted by the University of Washington, African American neighborhoods have twice as many payday lenders in their communities as the rest of the state. Charging high fees on short-term loans to people living paycheck to paycheck is big business for payday lenders. In 2005, payday lenders indebted Washington residents by $1.4 billion and made more than $170 million from loan fees.

The industry reaps the bulk of its profits from people who are caught in debt. 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. In fact, only 2.5 percent of the payday loans made in Washington State are to borrowers who take out one loan in a year.

Almost 82 percent of borrowers cannot repay the first loan they take out and thus get caught in the cycle of borrowing more to pay off the initial loan, plus the fees. In 1995, our state legislature made predatory lending legal by allowing lenders to charge almost 400 percent interest. They created a Payday Lender Loophole that allows payday lenders to skirt the laws that other businesses have to follow. Other financial institutions have a cap on interest rates at 36 percent APR; so should payday lenders. While many people in Washington need short-term loans in order to get by, what payday lenders offer comes at an unfair price for consumers. Washington state must not allow people with lower incomes to be the targets of lending practices that keep people in poverty. State lawmakers should pass legislation to stop predatory practices and help working families avoid becoming trapped in a cycle of debt.

Action: Contact your state legislators and ask them to pass House Bill 1020 and cap the interest rates on payday loans at 36 percent. You can either call the Legislative Hotline at 1-800-562-6000 or visit www.povertyaction.org to take action online.

Information for this column comes from Statewide Poverty Action Network.