News : Poor Credit Cash Loans

Guest Opinion: Borrowers trapped in debt cycle

28 August 2008

Payday lending stores and their mostly out-of-state owners have been practicing what amounts to legalized thievery for eight years, and they now are trying to convert the experiment into a permanent way of life.

Their method of high-interest, short-term profit-taking preys on those who can least afford it - the poor, the desperate and the financially unsophisticated.

The maximum interest rate for all other Arizona financial institutions is 36 percent, but the Legislature in 2000 granted an exemption for payday lenders, requiring, however, that the enabling legislation expire on July 1, 2010.

The number of payday storefronts has mushroomed since the exception was made, and about 650 of them now operate in strip shopping malls.

That may well be a number greater than pizza parlors, which charge their customers considerably less.

Three veteran Phoenix-area lobbyists - one-time legislator Stan Barnes, public relations man Mario Diaz and attorney Lee Miller - have walked the Capitol halls in recent years trying to persuade the Legislature to eliminate the 2010 sunset clause. They have failed.

Now they have come up with Proposition 200, an initiative misleadingly labeled the Payday Loan Reform Act.

Through their Arizona Community Financial Services Association, the lenders have raised nearly $9 million to propagandize and try to win voter approval in November.

The title of Proposition 200 is deceptive, to say the least. The use of the word "reform" makes a mockery of the traditional definition of the word, which means "to improve."

Two provisions of Proposition 200 are crucial to the lenders. First, it would eliminate the 2010 sunset clause and second, it would still allow triple-digit interest (391 percent).

In addition, it would authorize the lenders to have electronic access to the borrowers' bank accounts and require the state to create a bureaucracy to monitor customer loans.

The industry has focused much of its campaign on the idea that payday loans provide a financial "choice." That they do, but it is an imprudent choice.

Employers offer workers a choice to come to work or not. Failure to do so results in dismissal. Drivers can choose to exceed the speed limit. If convicted, they are punished. Houses of prostitution provide a choice. Society bans them. The list could go on indefinitely.

One question the Proposition 200 supporters do not raise: How did Arizonans manage to get along before payday lending was legalized?

The answer is simple. People in financial difficulty went to their families, their friends, their churches, their employers, their banks and credit unions, the parties to which they owed money.

They worked out their difficulties, usually in a manner that required immediate, but temporary, spending sacrifices.

A major problem with payday loans is that a borrower in need of $50 or $100 today is unlikely to have an extra $50 or $100 with which to pay back the loan in two weeks.

That means the debt must be rolled over, and if the original lender is reluctant to do so, the borrower simply goes down the street to a different company, then returns to pay off the first loan.

Research by the Center for Responsible Lending has shown that predatory payday loans trap most borrowers in unending cycles of debt.

In Arizona, the Southwest Center for Economic Integrity says, the average borrower will pay back $841 for a $325 loan after having to renew it at least eight times.

The Department of Defense recognized the dangers and insidiousness of payday loans and convinced Congress to limit loan cost to 36 percent for members of the military and their families. That law went into effect last October.

If high-interest loans are bad for the military, why aren't they bad for the rest of us?

More than a dozen states have banned payday lending simply by capping short-term interest rates at 36 percent or less. In Georgia, the practice has been made a felony.

For the moment, the "choice" facing Arizonans in November is whether to allow the lenders to remain after July 1, 2010. That should not be too difficult. Vote "no" on Proposition 200.

Source : http://www.tucsoncitizen.com/daily/opinion/94570.php