Proposal To Raise Payday Loan Cap Concerns Consumer Advocates
What's the motivation behind a proposal to raise the $300 cap on payday loans? We speak to Investigative Reporter Amita Sharma about why Assemblyman Charles Calderon (D-Whittier) is pushing for the payday loan cap to be increased to $500, and what consumer advocates are saying about the idea.
Amita Sharma, KPBS Investigative Reporter
This is a rush transcript created by a contractor for KPBS to improve accessibility for the deaf and hard-of-hearing. Please refer to the media file as the formal record of this interview. Opinions expressed by guests during interviews reflect the guest’s individual views and do not necessarily represent those of KPBS staff, members or its sponsors.
ST. JOHN: You're listening to These Days on KPBS, I'm Alison St. John in for Maureen Cavanaugh. Payday loans have long been a way to get a quick cash advance, no questions asked. You can get smaller loans than a bank would often offer, and the interest rates are astronomical. A California legislator wants to raise the limit on what you can borrow from a payday loan store, but consumer advocates say this is just asking for trouble. KPBS reporter Amita Sharma is here, thanks for coming in.
SHARMA: Thanks for having me, Alison.
ST. JOHN: So, it's [CHECK AUDIO] who wants to raise the cap on payday loans. Why is he going about this?
SHARMA: Well, quite simply because it hasn't happened since the time payday loans started back in 1996. I spoke with assemblyman Calderón's chief of staff, Tom white, and he said that the lending cap, again hasn't been raised since 1996, and that they just had heard what nay call compelling arguments from various people that it was now time to do it. The people needed access to this money. And that -- that $300 wasn't quite cutting it for them. Stow they decided to lift the cap. Here's more of what he said.
NEW SPEAKER: People don't have access to money. Oftentimes any other way than a product like this. And they either can't qualify fair credit card or, the banks don't lend this amount of money generally.
ST. JOHN: So he's making the point that in this economic downturn, you know, people's debts are getting bigger, and perhaps it would help them out to raise the cap of what they can spend. I think it would be helpful if you explained to us how a payday loan works.
SHARMA: Well payday loans allow people to borrow against future paychecks at very high interest rates. I think one consumer advocate quoted 460 percent. So I go in, I'm expecting my paycheck in a week or so, but I ask for a cash advance. And if I can't come back and make that payment immediately, they actually have the ability to take it from my next paycheck. There's lots of paperwork that you have to provide. And a lot of the advocates I spoke to yesterday say, you know, the intention really of payday loans is to help people who are in a pinch. They have an unforeseen expense, their breaks go out in their car, there's some kind of medical expense, and this helps them cover that temporarily. But there are a lot of people now who are using these lenders to borrow against their Social Security checks, to borrow against their unemployment checks, to borrow against their disability checks. And when they get that next check, because the interest payments are so high, they don't have the ability to pay off what they borrowed. And so then they borrow again. And they borrow again. And they borrow again. And oftentimes, people end up making interest only payments on the initial borrowing. And I was quoted one stat yesterday that said up to 44 percent of the people who borrow over a period of two years end up defaulting on those loans.
ST. JOHN: So I guess the reason that they're attractive is that because of the fact that it comes out of their paycheck or their Social Security check, the payday loan store is guaranteed to get the money back so much it's a nice safe loan for the payday loan store, but it's a horrendously heavy interest rate. 18 percent on the credit card seems high, but you're saying this is like 400 --
SHARMA: 450 percent. A lot of folk goes into it, they think it's attractive for them, the borrowers, they're going in, they're getting quick cash, they're getting money on the spot. What could be better? But for a lot of these people, it's really, as people call it, a debt trap.
ST. JOHN: So what are consumer advocates saying about this proposal to raise the cap? Are they saying it's gonna help the people who need financial help in this bad economic time?
SHARMA: No, they're saying it's just gonna make things a lot worse. Because if people right now cannot pay off the $300, how are they gonna pay off the $500? I spoke with Jean Anne fox, of the consumer federation of America, and here's what she said.
NEW SPEAKER: It would be much more difficult to pay off a $500 loan. The larger the loan amount, the more likely people are 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 anticonsumer piece of legislation.
ST. JOHN: Okay. So I guess Calderón might argument, yes, but where are they gonna get the money if they need 500? It is difficult, isn't it, to get that loan from a bank, as far as I understand.
SHARMA: Well, you know, there are -- some of these people who apply for these loans actually do have balances on their credit card that they could borrow against. And at interest rates far, far better than what they're borrowing at now through payday lenders. There are also pawnshops that offer loans, there are other institutions as well, there was a pilot program set up about a year and a half ago that allows people to go in and borrow small amounts at an interest rate of 60 percent. Again that's not ideal, but it's certainly not 460 percent.
ST. JOHN: Way better than a payday loan. So there have been efforts in the past to raise that cap. What happened to those proposals?
SHARMA: Well, they were is shot down precisely for the reasons that we've outlined. And I believe that the efforts in the past did contain some safe guards within them, but this bill as I'm told does not have any safe guards.
ST. JOHN: So assemblyman Calderón squeezed the proposal in right before the assembly went to recess.
SHARMA: Well, yeah, it's interesting. The bill is AB 1158. It was originally intended to make a change in California's credit union law. But a couple of weeks ago, assemblyman Calderón altered it or amended it completely to raise the cap on payday loans, from $300 to $500, and again he did it right before the assembly was about to go on recess.
ST. JOHN: And where the legislation standing right now, Amita?
SHARMA: Well, the bill passed through the assembly banking committee on Monday. And it is being referred to the assembly appropriations committee.
ST. JOHN: So and you are actually planning on doing a bit of a feature to look into this more i understand. Is it something you feel is important to really is it something that you feel is important to really get more of the word out on?
SHARMA: There are more issues here. When people borrow this money, they're not supposed to take out multiple loans from different payday lenders. However, that is happening. And again, it's against the rules to do that, but there is no enforcement of this. So people are getting even deeper into a financial hold than many of us think.
ST. JOHN: Okay, well, I'm glad you're keeping an eye on this. That's Amita Sharma, our investigative reporter. Thanks for joining us Amita.
SHARMA: Thank you Alison. Stay with us talking up next, we'll be talking to the new interim president at southwestern college, Denise Whitaker. The college risks losing its accreditation if it doesn't take some significant steps to reform things. That's coming up, right after this.