Regulate, don't ban, state's payday lenders
December 13, 2006 - Concord, New Hampshire
Payday lenders are storefront shops that give customers small, no-collateral loans for a fee and a promise to pay the money back in a week or two. They used to be a sign of a big city. High-interest lenders require a steady supply of people who live paycheck to paycheck.
But we are not a nation of savers. This month, a third payday loan shop opened on Concord's Main Street. Statewide, two dozen more are in the works.
Credit counselors correctly call the loans a trap that draws borrowers into a debt spiral. Most want the practice banned. Lenders correctly say their fees can be less costly than bounced checks or utility reconnection charges. The sorry reality is that such lending can be predatory, but if it didn't exist, people with bad credit would have even fewer places to turn when in a bind.
Lawmakers should cap interest rates but set the ceiling high enough so that lenders aren't driven from the state. When cars break down or a utility bill is overdue, workers with a job but bad credit or maxed-out credit cards need a way to borrow.
Most of New Hampshire's two dozen payday lenders operate along the state's borders for a reason. Every other New England state bans the practice or caps interest rates, which can run 400 to 800 percent per year. Two Concord loan shops charge $20 for every $100 borrowed -- the equivalent of an annual interest rate of 520 percent.
Lawmakers drew payday lenders to New Hampshire in 1999 when they scrapped the cap on small-loan interest rates. Although some now believe that was a mistake, an attempt to reinstate a cap failed last session.
Manchester Sen. Lou D'Allesandro, one of the sponsors of the original effort to remove the cap, now wants one. The trick, he said, will be to set rates high enough to keep payday lenders operating but low enough to keep borrowers out of serious trouble.
New Hampshire law does protect consumers by forbidding the common practice of allowing borrowers to "roll over" their loan every week or two for another fee. But it doesn't prevent borrowers from simultaneously getting loans from more than one payday lender. Thus, as loan shops proliferate, so will problems.
Earlier this month, the UNH Office of Economic Initiatives and the North Country Council issued their second report on the income required to meet basic needs in New Hampshire. In Concord, two working parents with two children must earn just under $50,000 to do that. A single parent with one child needs $36,405 per year. Many households earn less than that, and money is often short.
Lawmakers should explore another potential solution to the problem. Some nonprofit credit unions already provide payday loans at more affordable rates, and others have spoken to Banking Commissioner Peter Hildreth about offering the service. The loans will never be cheap because processing them costs money and default rates can be high. But community service organizations might be willing to make the loans for a small return while providing credit counseling. Borrowers could get both money and help in managing it.
Concord's payday loan shops appeared busy this week. People need money for Christmas presents now, not two weeks from now. The shops will be busy after Christmas, too, when postponed bills fall due.
A payday loan should be a last resort, not a way of life. But when a little cash is needed to tide a worker over, it would be nice if a payday loan could be obtained from a lender with the borrower's best interest at heart.
Concord Monitor, Monitor Staff, Editorial
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