Wednesday, April 27, 2011
A proposal to raise the cap on risky payday loans in California is making its way through the state Assembly.
Payday loans allow people to borrow against future paychecks in exchange for immediate money. But the loans carry such high interest fees - up to 460 percent annually -- that borrowers get trapped in a cycle of debt. Some people even borrow on their unemployment checks. It is against this backdrop that Assemblyman Charles Calderon has proposed raising the cap from $300 to $500. Tom White is the Whittier Democrat's chief of staff. He says the limit hasn't gone up since the inception of payday lenders in 1996.
"People don't have access to money often any other way than a product like this," White said. "They either can't qualify for a credit card or banks don't lend this amount of money generally."
But consumer advocates say there are alternatives for people in need of quick cash.
Pawn shops and other lenders offer loans with longer terms and lower interest rates. Jean Anne Fox of Consumer Federation of America says Calderon's bill to increase the lending limit for payday loans is irresponsible.
"It would be much more difficult to repay a $500 loan," Fox said. "The larger the loan amount, the more people are going to get caught in repeat borrowing to keep the check from bouncing that they left with the payday lender to secure the loan. So this is an anti-consumer piece of legislation."
Consumer groups say 44 percent of payday borrowers default in the first two years.