By LESLIE COLLINS
December 12, 2012
Christmas has been commercialized and any department store, large or small, will remind you that Christmas is only days away. Even the grocery stores have joined in, blasting Christmas themed music and running holiday specials.
Beyond the good cheer and giving spirit, every store wants a piece of your paycheck this Christmas. And that paycheck may eventually become smaller if the “fiscal cliff” hits.
Northeast News’ managing editor recently received a flyer in the mail from a local payday lender encouraging cash-strapped residents to use payday loans to purchase Christmas gifts for their loved ones. While it may sound like a solution in theory, using payday loans for Christmas shopping could turn into a financial nightmare, making you regret Christmas all year-long.
“It’s almost suicidal,” former Missouri state Rep. John Burnett said. “The interest rates are so high that for the average consumer to use that as a source of income for extra expenses like we do at Christmas would be really almost suicidal financially speaking.”
In Missouri, residents are allowed to borrow up to $500 and renew their payday loans up to six times. The Annual Percentage Rate (APR) can soar up to 1,950 percent, since Missouri allows lenders to charge fees and interest up to 75 percent of the loan amount. However, the average APR charged in Missouri is 444.61 percent, according to the January 2011 Missouri Division of Finance report. According to a July 2009 Better Business Bureau study of the Missouri payday loan industry, Missouri allows the highest APR compared to the 43 states that have either banned payday loans or set APR caps. Only seven states have an uncapped APR. In addition, the study found that of the nine contiguous states, Missouri is the only one that allows residents to renew a payday loan.
“It’s a good idea if you can pay it back in a one-time payment,” said Central Bank of Kansas City President Bill Dana. “If you don’t have the money today and you get a paycheck on the 31st and want to borrow the money on the 23rd to buy your Christmas presents, then maybe it makes sense.
“But, the reality is most folks automatically renew their payday loans and they fall back into the same issues of money management that they had before, and they never pay it off or it takes them a long time to pay off.”
Compounding the situation is that those who generally use payday loans are those who can’t get a loan from a bank or get a credit card, Dana said.
“Their credit is so poor they end up using a payday loan company,” Dana said. “I think in most cases it’s (payday loan industry) abusive and in worst cases, predatory against a low income consumer that probably should not be getting that loan.”
According to a 2007 survey conducted by the Missouri Division of Finance, the average age of those using a payday loan in Missouri is 43 and the average annual income is $24,607.
Of the borrowers surveyed, 12 percent were on disability or using Supplemental Security Income (SSI).
A number of payday lenders simply rewrite the loan instead of renewing, Burnett said.
“So, you can really get into a spiral, just a really horrible spiral,” he said.
Asked how long it takes for someone to pay off a payday loan, Burnett said the average length is eight to 10 months in Missouri.
“It looks easy because if you get a $100 loan and they charge you $15 until payday to pay it, it seems logical that you can pay the $15 along with the $100,” Dana said. “But most folks would rather roll it over and renew the loan. They keep delaying the (full) payment. That’s how the interest rate compounds to that big number.”
If a consumer was charged 15 percent interest every two weeks on a $100 loan, that would add up to $390 in interest alone in one year, Dana said.
“That’s $390 to borrow $100 and that doesn’t include any principal,” Dana said. “You still owe the $100 after that.”
Asked why Missouri allows such high interest rates, Burnett said, “It’s just raw capitalism. The legislation was written by the industry and they took advantage of everything they could. It was a new industry when they wrote it.”
“The political power of these payday lenders in Missouri is incredible,” Burnett continued. “They have the lobbyists and the legislators cornered.”
The payday loan industry isn’t shy about doling out money to political campaigns or to lobbying expenses, he said.
For eight years, Burnett served as a state representative, and all but one year he sponsored legislation to cap the annual rate for payday loans at 36 percent.
“Most years we didn’t even get a hearing on it,” he said.
Earlier this year, Missourians for Responsible Lending tried to garner enough signatures to place similar legislation on the ballot, but lawsuits delayed their collection of signatures and they were a few signatures shy in several Congressional districts.
Years ago the practice of charging astronomical interest rates was a federal crime, he said.
“We called them loan sharks,” Burnett said. “It was common for people to be arrested for charging interest rates that are half of what they charge now legally.”
Instead of using a payday loan for Christmas shopping, Dana suggested talking to your local bank or borrowing money from relatives or friends. People could also forgo giving presents this year, he said.
“The best way to do it is to save through the year, so you’re ready for next year,” Dana said.
Burnett also suggested looking into layaway programs at the big box retailers.
“The big joke was you can always borrow from your family, but most of the consumers that are stuck with payday loans don’t have families that can support them,” Burnett said. “You just have to tighten your belt.”