Low wages, a tight economy and inadequate state laws have made Iowa a "growth area" for the payday loan industry. One-hundred forty-six payday loan offices have opened in Iowa since our state's laws were changed to make them legal in 1995. Thirty new offices opened up just this year alone.
Payday loan companies make cash advances on personal checks, charging 300 to 400 percent interest and often hooking their customers into a never ending cycle of debt. Here's how a typical payday loan works.
A customer writes a check for $227.78 in exchange for $200 in cash. Two weeks later, the customer returns with $227.78 to pay off the loan and retrieve their check. The annual interest rate on this loan is 362 percent.
Paying 362 percent interest for a two-week loan is bad enough, but many customers are forced to take out new loans to pay off their old loans. I talked with one single mom who pays a $27 fee every two weeks on a $200 loan. She has been making that payment for more than six months. Assuming she manages to find $200 to finally pay back this loan, she will have paid more than $333 in interest to borrow that $200 for six months. This is not a service - it is a consumer credit ripoff.
Payday loan operators have told me that it is misleading to calculate an annual rate of interest based on the fees they charge. They tell me that payday loans are just two-week cash advances to get you by until the next paycheck. And they are spending lots of money in advertising to tell their customers the same thing.
The truth, however, is that far too many Iowans find themselves on the same costly debt treadmill faced by the single parent I mentioned above. The Iowa Division of Banking has found that 48 percent of the payday loan borrowers took out 12 or more loans with the same company in the past year. They are paying those inflated "fees" every two weeks and they really, truly are paying 360 percent interest or more.
In 1996, the Iowa Legislature passed the laws which made Iowans targets of these companies and it is our responsibility to correct them. I plan to introduce legislation to reduce the fees and lower the interest rates, to stop the practice of making new loans to pay off existing loans, to provide consumers with more information, and to require the state to more closely examine Iowa's growing payday loan industry.
Forced to choose between failing to put food on the table or taking out a payday loan at 362 percent interest, many working Iowans are taking out the loan. They should not be gouged for choosing to feed their families. The least we can do is lower the outrageous interest rates and give people a better chance of knowing what they are getting into.
Joe Bolkcom is a member of the Iowa Senate Commerce Committee. He can be reached at 319-337-6280.
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