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Ending the Payday Loan Debt Trap

Ending the Payday Loan Debt Trap

Rabbinic tradition has always encouraged Jews to provide loans to assist those in need. The Talmud is clear, “the one who lends money is greater than the one who performs charity (Shabbat 63a).” Ethical lending provides short-term assistance to a person in need, giving them the time and resources to become self-sufficient. Ethical lending requires dignity and mutual respect between lender and borrower.

 

Today, too many Americans are forced to depend on unethical predatory lending just to get by. These loan schemes vary in form, but instead of helping individuals become self-sufficient, they send them into inescapable cycles of debt.

 

One of the most prevalent types of predatory loans is a payday loan. A payday loan is a small loan, typically less than $500, and is typically due within a few weeks, by a person’s very next payday. Unlike other kinds of loans, a person who is issued a payday loan must write a check to the lender for the full value of the loan. This check can be cashed on the date the loan is due regardless of if the customer has sufficient funds to repay.

 

Payday loans are problematic for two reasons. First, they are regularly issued with unreasonably high interest rates. According to the Consumer Financial Protection Bureau (CFPB), a typical two-week payday loan carries fees that equate to an annual percentage rate (APR) of 400% in interest. Consider that the average APR on a credit card is 12% to 30%, and that 37 percent of borrowers state that “they have been in such a difficult financial situation that they would take a payday loan on any terms offered,” it becomes clear that payday lenders take advantage of their customer’s desperation.

Second, payday lenders are not required to consider the ability of their customer to repay the loan when it is issued. Customers take out payday loans to pay a bill when due. They use the funds issued to pay the bill, often knowing well that they will be unable to pay back their loan with interest. Recognizing this, the customer takes out a second loan to pay back the first loan and the cycle of debt begins. The average borrower takes out eight loans each year in order to ensure that there is enough money in their checking account to keep up with expenses and the interest of previous loans.

Payday lending has significant costs. Those who are unable to pay back a loan are charged new overdraft fees from their banks. Some lenders even lose their car or other assets when they are unable to pay. According to the Center for American Progress, Americans lose more than $9.1 billion each year due to predatory lending practices.

 

Only Congress can pass legislation to cap interest rates for payday loans or prohibit lenders from using checks to access bank accounts. This spring, the Consumer Financial Protection Bureau (CFPB), the organization that regulates lending, is set to issue a rule to begin to control payday lending practices. This rule will accomplish two outcomes:

1)          Require lenders to determine that the customer will have the ability to repay a loan issued

2)          Provide fairer terms for borrowers who rely on short term and longer term payday loans.

This CFPB rule will ensure that payday lending can exist without trapping customers into a cycle of debt. When the rule is released there will be a 90-day period for interested individuals to submit comments to the federal agency in support of the rule. Visit the RAC’s economic justice page for more information about predatory lending, and check back for information on how to submit a comment in support of this important rule. It will take a lot of voices of support, but we will keep working to end predatory lending practices everywhere they exist.

Tyler Dratch is the Torah, text, and tradition coordinator at the Religious Action Center of Reform Judaism (the RAC) and a rabbinical student at Hebrew College in Newton, MA.

Tyler Dratch

Published: 5/06/2016