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I was disheartened to read a recent editorial in a statewide paper suggesting that Rhode Island needs payday loans.
This misguided perspective ignores 10 years of hard facts. Report after report has confirmed that the sky-high fees and exorbitant interest rates ensnare low- and moderate-income families in a debt trap.
In a study released last month examining how borrowers use payday loans, the Consumer Financial Protection Bureau found that four out of five payday loans are rolled over or renewed within two weeks – and roughly half of all loans are made to borrowers who take out 10 or more loans in a row. Payday loans are not short-term, two-week products as industry advertising suggests; most borrowers are indebted for many months at a time.
Tellingly, this CFPB report concluded that the very business model of the payday industry depends on people unable to repay their original loan because almost half of their business comes from people who couldn’t afford to repay the loan in the first place, which is exactly what the payday lenders want.
More facts about payday: It does more harm than good for local businesses and places even more strain on social services. Borrowers trapped in the debt cycle that payday loans create are more likely to lose their bank accounts, become delinquent on other debts, and file for bankruptcy. But payday loans have negative effects on the local economy as well; just last year, the Insight Center for Community Economic Development found that each $1 in fees paid to payday lenders by cash-strapped borrowers results in $0.24 lost in economic activity in the community – attributable largely to a reduction in household spending.
In Rhode Island, the total payday lending interest payments in 2011 was more than $7 million. This resulted in a $1.6 million loss for the state’s economy as families paying off payday debts were unable to use those dollars in the larger economy.
Given all of this, I have and will continue to lend my support to reform efforts. •