In Louisiana, payday lenders dot the landscape more than McDonald’s golden arches and can charge an annual percentage rate 30 times higher than Sears.
The premise is simple: Borrow a small amount of money now and repay it when you cash your next paycheck. However, The Pew Charitable Trusts found that in practice repayment usually consumes a third of a paycheck, resulting in borrowers across the nation paying fees to renew their payday loans and then renewing them again and again or taking out more payday loans. Slowly, a mountain of fees and additional loans builds.
“I don’t know why Louisiana’s Legislature hasn’t acted to curb these abusive lending practices, but I do know other Southern states have looked at these loans and chosen to effectively ban them,” said Jan Moller, executive director of the Baton Rouge-based Louisiana Budget Project.
Moller estimates 1,000 storefront payday lenders operate in Louisiana. His organization lists the annual percentage rate for a payday loan as 780 percent — more than 30 times higher than the rate Sears charges for its standard credit card.
Among grassroots groups and in poorer legislative districts, concern is growing in Louisiana about the loans. As early as next year, the Legislature could be asked to tackle the issue, although changes could be tough given how entrenched the payday loan industry is in Louisiana.
Troy McCullen, president and CEO of Finance America Business Group, owns 31 Cash-2-U lenders across Louisiana, including locations in Baton Rouge, Zachary and LaPlace. He said Louisiana already has protections in law to prevent sky-high interest rates and loan renewal fees.
McCullen said people just love to hate payday lenders, which he estimates average $4 million in transactions a year in Louisiana.
“We have the best consumer protection law in the country, and I helped put that in place,” McCullen said, adding, “We’re not bad people. I go to church. I’m raising five kids.”
McCullen offered this scenario on a $200 loan: The loan costs $40 if it is paid off within two weeks.
If the money is not repaid, a 36 percent interest rate can kick in that would add $72 a year. The next year the loan is not repaid, an 18 percent interest rate is attached.
“I’m not trying to hurt anybody. I want to be paid back. If one person doesn’t pay back $200, I’ve got to have seven people pay to break even,” McCullen said.
He said he helps people who don’t have credit cards cover unexpected expenses.
Where Louisiana draws criticism from Pew and others is in allowing a lump-sum repayment structure. Forced to repay the loan in a short time instead of over several months, people sometimes take out more payday loans to stay afloat and quickly rack up huge debt.
Dianne Hanley, a leader in the grassroots organization Together Baton Rouge, said she hears criticism of payday loans whenever she sits down with church leaders. She shares that feedback every time she talks to a legislator, she said.
“We talk to lots and lots of people,” Hanley said. “We’ve been getting more and more stories about how people are struggling with (payday loans).”
Pew — a nonprofit organization focusing on public policy — lists Louisiana as one of 35 states with what it characterized as unaffordable lump-sum payday loans. Instead of being able to stretch out payments, borrowers must repay the full amount within a short time. Pew recently ranked Louisiana’s payday-loan usage among the highest in the nation. Only three states register bigger use of the loans.
Arkansas chased storefront payday lenders out of that state four years ago. In Georgia, the Governor’s Office of Consumer Protection warns that “payday loans are generally illegal.”
Colorado recently stretched out the repayment schedules and lowered the maximum interest rates on payday loans. The cost to borrow $500 for a year from a payday lender in Colorado now is $580 instead of $1,950. As a result, borrowing $500 in Colorado costs less than it could cost to borrow $200 for a year in Louisiana from a payday lender.
Colorado is the lone state to limit the percentage of biweekly gross income that an average payday loan can consume to 4 percent. North Carolina, New York and Maryland are among 15 states that do not allow high-interest payday loans. In 30 other states, Louisiana among them, the average payday loan consumes 30 to 39 percent of a borrower’s biweekly gross income, according to Pew.
Louisiana has put in place a few prohibitions over the years, including allowing a maximum loan of $350, disallowing renewals or refinancing and forbidding lenders from threatening borrowers with prosecution. However, there is no prohibition against requiring lump-sum payments and nothing to prevent a borrower from stopping by multiple payday lenders for loans. Payday lenders can garnish wages and trigger a bounced-check fee.
According to Pew, the typical payday borrower already is in financial trouble with poor credit scores, high credit card debt and an empty bank account.
“People are so ashamed. They don’t like to talk about it,” state Rep. Regina Barrow said.
Barrow’s Harding Boulevard district office sits in a depressed area of Baton Rouge, not far from the airport and Southern University. U.S. Census data from 2007 to 2011 for her office’s ZIP code spin a web of sobering statistics: 16 percent are on food stamps, 17 percent live below the federal poverty level and 27 percent of households survive on less than $25,000 a year.
Barrow, D-Baton Rouge, tried to outlaw payday loans as a newly elected legislator in 2006. She hoped to prohibit payday lending and repeal the state’s small loan act. Her legislation died without getting a committee hearing.
As she recalls it, there was tremendous opposition and many promises that regulations would be strengthened. In the end, she said, only a few things were done and they did not amount to much.
Barrow plans to take another crack at curbing payday loans when legislators convene at the State Capitol in March.
“I’ve heard of interest of 700 percent. That’s criminal,” Barrow said.
McCullen said the fees on loans already are flat, with interest set at a maximum of 36 percent. He said the fees cannot be compounded, offering even more protection to the borrower. He said the annual percentage rate looks horrible but really is not.
He said 10 to 15 percent of borrowers abuse payday loans and take out too many. The rest are responsible and realize that a short-term loan until payday is cheaper than bouncing a check, McCullen said.
Shawn, a Baton Rouge licensed practical nurse who asked that her surname not be used, took out a payday loan in 2002 when she needed money to put presents under the Christmas tree for her children. At the time, she was making $8 an hour as a medical assistant, despite working hard to get a GED and job training.
Two weeks after Shawn took out the $200 loan, it came due. She could not repay it so she took out another payday loan. By the time she cleared her debt, she had paid $1,500 to borrow $200.
“They say that they’re there to provide a little bit of assistance … but you get stuck in a cycle,” she said.
More than a decade later, Shawn hopes to become a registered nurse. She has only one child left at home. Money is tight, but she has no plans to take out another payday loan. She would like to see the Legislature eliminate them entirely.
“It’s geared toward the poor people , who if they could afford to do better, they wouldn’t be dealing with it anyway,” she said.