Critics say payday loans target the poor and take advantage of those in tough situations, but advocates say payday loans are helpful to working people and the middle class.
Nevertheless, the debate in Wisconsin as to how to regulate payday loan services is heating up, with legislation under consideration in both the Senate and Assembly.
Meanwhile, Illinois has a law capping fees at $15.50 per $100 borrowed.
The Wisconsin State Assembly currently has a bill, AB 211, which would put a cap on finance charges on payday loans at 36 percent per year. The bill was introduced at the end of March and was referred to the Committee on Financial Institutions. There currently is no scheduled date to debate the bill.
Rep. Kim Hixson, D-Whitewater, who represents a portion of the Beloit area and Rock County, was one of 18 representatives who introduced the bill.
“I really feel like this is a good consumer protection bill,” he explained. “They really basically have no limits as far as how much interest they can charge. I was really shocked.”
Interest rates could reach as high as 600 percent in a year if the loans are not paid off. Advocates explain consumers are typically charged an average of $15 per $100 if the loan is paid on time.
Hixson said payday loan stores are doing what credit unions should be doing and that is providing people with small loans.
“There are a lot of people who are in need, who are really hurting by these lenders,” he explained. “This is a consumer protection issue and most of the people who need these loans are usually lower-income people, least able to pay these really high percentage rates. To me it really is taking advantage of people when they're having problems and people get a little desperate and often times it makes a bad situation much worse.”
As of October, Wisconsin has 515 payday lending services. In 2006, there were 474. Last year, about 1.7 million loans were given out, amounting to $660 million borrowed.
Payday lending services are required to obtain a license from the state's Department of Financial Institutions. Beloit has 10 payday lending agencies.
Steven Schlein, spokesman for Community Financial Services Association, said the biggest misconception about payday loans is the interest, or the annual percentage rate issue.
“Any short-term product is going to have a high APR and this is really relevant to a two-week loan,” he explained.
The APR gets higher when borrowers continue to roll over the loan, Schlein said. Typically, borrowers pay between $15 and $17 per $100 if the loan is paid back by the end of a two-week period, he added.
“Ninety percent of our customers are paying their loans,” Schlein said. “So a very small percentage is getting into trouble. However, we want to address that.”
Many payday lenders have a no-fee extended payment plan, which allows clients to pay off their loan without the interest rate increasing. However, participants of this payment plan will not be allowed to borrow with the same lender again.
He said it's a myth that payday loans are used primarily by poor people. According to CFSA, the majority of payday advance customers earn between $25,000 and $50,000 annually.
“Our customer base is the heart of the middle class,” Schlein said. “People with checking accounts, with steady income.”
Currently, members of the Senate are working on drafting a bill to regulate payday loans. During the last session, State Sen. Judy Robson, D-Beloit, was one of four senators who introduced Senate Bill 674.
According to the bill, which was never taken up by the Committee on Housing and Financial Institutions, “No payday loan provider may charge, contract for, or receive fees and interest for a payday loan in an aggregate amount that exceeds 5 percent of the amount of the payday loan.”
The bill continues, “no payday loan provider may make a payday loan with a term of less than 30 days.”
In a written statement, Robson stated she has been working on legislation to regulate payday loans for the last several years.
“Payday loans exploit the people who least can afford them - the poor, senior citizens, the unemployed and people living from paycheck to paycheck,” she wrote. “For the last several legislative sessions, I have worked independently and with other legislators to find an effective way to make sure that these short-term loans are exactly that - small loans to help someone get through a temporary pinch without getting sucked into a crippling cycle of debt.”
Nadine Gratz, a legislative analyst in Robson's office, said the senator is working with State Sen. Jim Sullivan, D- Wauwatosa, on reworking SB 674.
“One of the things we need is legislation that limits the number of times a loan can be rolled over,” Robson wrote in her statement. “Without this protection, lenders can renew loans over and over - each time adding to the interest owed. Without controls, borrowers end up owing much more in interest payments than the amount they initially borrowed. In fact, the average annual percentage rate on a payday loan is a whopping 542.2 percent.”
The new legislation would make tracking payday loans more feasible. This in turn would prevent people from borrowing money from multiple payday loan places, Gratz explained.
In her statement, Robson went on to say, “It is possible to monitor compliance with the law by requiring lenders to enter all loans into a ‘real time' database. This software can also give the state a firm basis to prosecute lenders who violate the law. Illinois and Indiana are already using this powerful tool.”
Gratz said the bill is close to completion.
