Rolando Avila never imagined he’d have to rely on a payday loan. But when he was faced with a backlog of missed payments following a period of shaky employment, he says he borrowed one of the short-term, high-interest loans to keep food on the table.
Avila, public policy coordinator with the Statewide Action Poverty Network, said he paid the loan off on time, but doing so left him so strapped that he soon needed to borrow a second loan, which soon turned into another loan, until he found himself in crippling debt.
“Many people in desperate situations take out these high interest loans because they have no other option,” he said.
Avila, however, is not in favor of a proposal that some state lawmakers are billing as an improvement over the state’s current payday lending system.
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House Bill 1922 would replace Washington’s current payday loans with small consumer installment loans that would cost borrowers less and allow them more time to repay. The new loans, limited to $1,000 or 30 percent of a borrower’s gross monthly income, would carry an interest rate of 36 percent and repayment periods of six to 12 months.
Rep. Larry Springer, a Kirkland Democrat and the bill’s sponsor, said many families struggle with payday loans because they must be repaid in such a short time, 45 days or less. Many borrowers fail to meet their deadlines, and they end up taking out a new loan, and eventually another.
“And pretty soon, you look up, and it’s six months or a year later, and you’re so far in debt there’s no way to get out,” Springer said.
His bill is similar to a 2013 proposal that passed the state Senate 30-18 but died in the House, in part because of opposition from consumer advocates.
Critics such as Avila say the 2015 version isn’t much better. They contend it would encourage consumers to take on more debt and would create a loan product that would actually be more expensive than an option now available to payday loan customers.
“This is not a product that low-income consumers want, and it’s certainly not one that they need,” said Marcy Bowers, executive director of the Statewide Poverty Action Network.
Under the state’s existing system, borrowers can take out loans of up to $700 or 30 percent of their monthly income from payday lenders. Annual percentage rates — the effective interest rate once fees and additional costs are factored in — run as high as 391 percent.
But customers who can’t pay back their loans in time can request a better deal under changes made to the law in 2009.
A borrower could take out a $700 loan, inform the lender they cannot pay it back in time, and set up a six-month payment plan. The state Department of Financial Institutions estimates that the loan in that scenario would have 45 percent APR and the borrower would pay $795 over the life of the loan.
Under HB 1922, the new installment loans would have interest rates of 36 percent. But the addition of origination fees and monthly maintenance fees would push the effective interest rate to 213 percent — costing the borrower $1,195 over six months for the same $700 loan, according to DFI.
“That’s not really an improvement for working class people,” Avila said, “people who will feel every pinch when you have to pay those additional fees.”
However, most consumers do not take advantage of the opportunity to create an installment plan under today’s system; about 12 percent of consumers chose to do so in 2013, according to a DFI report on payday lending.
Springer’s bill is supported by Dennis Bassford, CEO and president of Seattle-based Moneytree, but with some reservations. Bassford, whose company also has locations in Colorado, would rather see Washington emulate that state’s higher interest rates and bigger loan maximums for small consumer installment loans.
“We’ve learned in Colorado that consumers in general like the flexibility and convenience of longer loans with smaller payments,” he said.
Springer received $3,800 in campaign contributions from Bassford and his family members in 2014, but says the money hasn’t influenced him. As proof, he points to his bill having stricter limits on interest rates and loan amounts than payday lenders want.
Springer said he doesn’t like payday lending but wants to ensure that people who need access to that kind of credit have a better option.
“A lot of people who are advocates for low-income families would like to see (loans) go away, but they won’t,” he said. “What I’ve tried to do is make that system of lending as fair and as less costly as possible.”