There’s a growing list of people and organizations that argue the loans prey on people who can least afford the loans’ TRIPLE-DIGIT interest rates.
Maria Galvan used to make about $25,000 a year. She didn’t qualify for welfare, but she still had trouble meeting her basic needs.
“I would just be working just to be poor and broke,” she said. “It would be so frustrating.”
When things got bad, the single mother and Topeka resident took out a payday loan. That meant borrowing a small amount of money at a high interest rate, to be paid off as soon as she got her next check.
A few years later, Galvan found herself strapped for cash again. She was in debt, and garnishments were eating up a big chunk of her paychecks. She remembered how easy it was to get that earlier loan: walking into the store, being greeted with a friendly smile, getting money with no judgment about what she might use it for.
So she went back to payday loans. Again and again. It began to feel like a cycle she would never escape.
“All you’re doing is paying on interest,” Galvan said. “It’s a really sick feeling to have, especially when you’re already strapped for cash to begin with.”
Like thousands of others, Galvan relied on payday loans to afford basic needs, pay off debt and cover unexpected expenses. In 2018, in Kansas alone, there were 685,000 of those loans, worth $267 million, according to the State’s Bank Commissioner.
But while the payday loan industry says it offers much-needed credit to people who have trouble getting it elsewhere, others disagree. There’s a growing list of people and organizations that argue the loans prey on people who can least afford the loans’ triple-digit interest rates. Those people come from lower-income families, have maxed out their credit cards or don’t qualify for traditional bank loans. And those groups say that not only can the states of Kansas and Missouri do more to regulate the loans — they’ve fallen behind other states who’ve taken action.
Payday Loan Alternatives
Last year, Galvan finally finished paying back her loans. She got help from the Kansas Loan Pool Project, a program run by Catholic Charities of Northeast Kansas.
Once Galvan applied and was accepted to the program, a local bank agreed to pay off about $1,300 that she owed to payday lenders. In return, she took out a loan from the bank worth the same amount. The interest was only 7%.
Now that she’s out, Galvan said, she’ll never go back.
She doesn’t have to. Making payments on that bank loan helped build her credit score until, for the first time, she could borrow money for a car.
“That was a very big accomplishment,” she said, “to know I have this need, and I can meet that need on my own.”
The project has paid off $245,000 in predatory loan debt for more than 200 families so far.
Claudette Humphrey runs the original version of the project for Catholic Charities of Northern Kansas in Salina. She says her program has been able to help about 200 people by paying off more than $212,000 in debt. But it hasn’t been able to help everyone.
“The Number One reason, still, that we have to turn people away,” she said, “is just because we have a limit.”
People only qualify for the Kansas Loan Pool Project if they have less than $2,500 in payday loan debt and the means to pay back a new, low-interest loan from the bank. The program doesn’t want to put people further in the hole if they also struggle with debt from other sources, Humphrey said.
“Sometimes, even if we paid that off, they would still be upside-down in so many other areas,” she said. “I wouldn’t want to put an additional burden on someone.”
Humphrey doesn’t think her program is the only solution. In her opinion, it should be lawmakers’ responsibility to protect payday loan customers the same way they protect all consumers — through regulating payday loans like traditional bank loans.
“Why are these companies not held to that same standard?” she said. “Why, then, are payday and title loan lenders allowed to punish them at such an astronomical interest rate for not being a good risk?”
Catholic Charities is just one of many nonprofits pushing for tighter rules. In Kansas, a coalition of interested individuals and groups has formed, Kansans for Payday Loan Reform, and they’re organizing to take on Payday Loan Laws during the 2020 Kansas Legislature.
The members of the coalition include churches and community organizations, said Shanae’ Holman, an organizer with Topeka JUMP, the group that is leading the push.
“There are other states who’ve implemented guidelines that tell you how much income… what percentage of your check can go to a payment,” Holman said. “Those are the types of regulations that we would like to see,”
She wants Kansas to require longer loan periods so borrowers aren’t hit with penalties when they can’t meet short payment deadlines.
Currently, the maximum period for a payday loan in both Kansas and Missouri is 30 days. In comparison, borrowers of small loans in Colorado must have at least six months to pay their loans back, with no maximum loan period. In Ohio, borrowers have between 91 and 365 days to pay back a loan. If the period of the loan is less than 91 days, the repayment must be less than 7% of the borrower’s net income.Both states set annual interest rates near 30%. Some states regulate payday loans the same way they do other consumer loans.
Kansas allows annual interest rates of 391%. That means a two-week loan of $500 at 15% interest can cost a customer almost $2,000 over the course of a year. In Missouri, the state allows interest equal to 75% of the initial loan amount for the life of the loan including all renewals, but wise loan companies have easily found ways to get around those loans. Rollovers or new loans, there’s not much difference other than the ability to charge a second interest rate of up to 75%.
Missouri law also limits the number of renewals to six and requires a five percent reduction of the original principal amount beginning with the first renewal. In 2014, a group fought to get a major overhaul in the state’s payday loan laws. A bill passed the Missouri House and Senate before being vetoes by Gov. Jay Nixon, who said the bill didn’t go far enough.
That bill banned rollovers and required lenders to offer “extended payment plans” to a borrower. No additional interest or fees could be charged during the extended 60- to 120-day payment period and borrowers would only be able to get one extended payment plan per month.
Last year, both Missouri and Kansas looked at small revisions in their payday policies, but in both states, the proposed changes went nowhere. However, this year, groups are hoping their collaborative efforts help the bills gain more traction.
State Representative Steve Helms (R-Springfield), chair of the Missouri House Subcommittee on Short Term Financial Transactions, is sponsoring a bill that he says will address some of the worst abuses in the payday loan industry, while still preserving access to loans for people with bad credit who need them.
The Kansas group plans to work with legislators during next year’s session in Topeka.
It’s the first time that such a large group has organized around the cause, said Jeanette Pryor, a lobbyist for the Kansas Catholic Conference. Payday loan reform is a perennial topic at the Statehouse, she said, but it’s hard to convince lawmakers to increase regulations.
“That was something that I heard in the beginning. ‘Why can’t an adult make a rational decision on their own? Why do we have to legislate this?’” she said. “The larger the coalition, the more opportunities to educate legislators.”
Nick Bourke is the director of consumer finance at Pew Charitable Trusts. It pushes for reform of payday loan laws. He said reform is long overdue in Kansas, which hasn’t updated its payday loan laws since 2005.
“It’s possible to provide small-dollar credit, even to people with damaged credit histories, for much less money than what Kansans are paying now,” he said. “But Kansas laws are outdated.”
In 2014, Pew Charitable Trusts conducted research on payday loan usage in each state. The organization found that 8% of Kansas residents had used payday loans in recent years, higher than the national average of 5.5%. The typical income for a borrower was $30,000.
An Option For Credit
Payday lenders say they offer affordable credit to the large proportion of Americans who don’t have enough cash to cover an emergency expense. The Community Financial Services Association of America, an industry group for small-dollar lenders, declined an interview due to scheduling conflicts, but sent a statement through email.
“Small-dollar loans are often the least expensive option for consumers,” said CFSA chairman D. Lynn DeVault in the statement. “Particularly compared to bank fees — including overdraft protection and bounced checks — or unregulated offshore internet loans and penalties for late bill payments.”
Most members of the coalition recognize there is a need for some kind of alternative for those who can’t get loans through the traditional banking system, so they’re not proposing getting rid of payday loans all together.
Some Kansas customers, like Keri Strahler of Topeka, say the loans are helpful.
Humphrey, of Catholic Charities, acknowledges the loans can be helpful for some customers. The question is whether the state can keep others from being exploited.
“I’m not saying there’s not a place for them,” Humphrey said. “(But) is there a better way to do what they do so that it’s not devastating families?”