Payday loans: Get up to $500 with little more than a few signatures and a checking account.
You have seen the commercials, seen the signs, and some of us have used them. There are at least two dozen payday loan listings in the 2012 Columbia phone book.
But to what extent should they be regulated?
As disclosure, I have taken out payday loans to help make ends meet, extra bucks for holiday shopping and to get my book off the ground. I can say that these loans do not come cheap, with annualized interest rates of 521 percent.
In real terms, expect to pay $100 in "fees" for a 14-day loan of $500 or a payback of $600. Pay it off in 60 days, it is $865.80. If you wish to pay it off in 90 days, $874.03. As much as $3,300 annually. That is a lot of scratch when money is already tight.
The rules to qualify for a loan are simple: have a job, have a checking account, have a… No, that is the extent. These are high risk loans, many made to people who have, at best, questionable credit ratings.
To say that these institutions are needed in our current economy is a proverbial understatement. Not that Columbia is doing so badly, but this is a statewide issue with Kansas City and St. Louis still showing high unemployment and home foreclosure rates and family farms struggling.
How tight is our money? The 2011 poverty line for a family of four is $22,350. Attend a Central Missouri Community Action’s "Poverty Simulation" and find that to break even that family needs an income of more than $36,000 to survive. More if there are medical bills.
In 2011, state representatives Mary Still, D-Columbia, and Mike Leara, R-Crestwood, attempted to curb the cost of payday loans, proposing to pare down the annualized interest to 36 percent and 18 percent respectively. Those bills died early deaths.
Leara's bill still allowed unlimited fees and did not set an annual percentage rate cap. It also permitted six rollovers. Still's 36 percent cap also would have capped additional charges and is the same as a federal law that protects military families.
For the 2012 Missouri legislative session, two senate bills, SB- 462 and SB- 476, have been introduced tackling the issue of the payday loan from a different angle — extend the amortization (time for the loan to mature) time from 14 days to 90 days while keeping the 521 percent interest rate. In other words, compound the interest quarterly not bi-weekly.
The bills also stress that "lenders shall be barred from bringing a civil action under 69 section 570.123." This appears to comply with the "You can’t get blood from a turnip" rule. Yes, the lender can collect for the bad check but cannot sue for damages.
I am sure there are horror stories from both sides of this discussion. I know that there will be those from the "pull yourself up by your bootstraps" group who believe that people who take loans out from payday companies deserve what they get. I have worn the shoes of the borrower, so…
SB-476, proposed by state Sen. John Lamping, R-St. Louis, is the better of the two currently proposed changes simply because it is a bit more comprehensive. The bill requires the loan to be amortized in three months instead of 14 days, requires equal payments, not accelerated, and limits the number of renewals of that loan to one, as opposed to "unlimited." This will, hopefully, eliminate the devastating "borrow from Peter to pay Paul" syndrome.
With the help of some uncomplicated math and based on quarterly compound interest, it appears the two-week payments for a $500 loan, keeping the $20 per $100 borrowing fee, would be closer to six payments of less than $105 or under $630 for a 90-day loan. (The actual amount equals $615.91, with payments of $102.65 over 15 days.)
This represents more than $200 in savings for those who are most in need. Under this proposal, bi-weekly payments would be reasonable, the borrower will not be stuck in a cycle of debt and the loan company still makes money.
But Lamping's bill does allow payday loan operators to charge up to 75 percent of the amount financed, which for the $500 loan would be $375.
Payday loans do have their place in our society and do provide a great service for those who need it the most. But the economically downtrodden do not have the lobbyists or voice to make their case.
I am throwing my support toward SB-476 with one suggested change — require the interest to be calculated on a "compound" basis.
David Rosman is an editor, writer, professional speaker and college instructor in communications, ethics, business and politics.