Debt trap: Breaking free from the cycle of payday loans

PAWTUCKET, R.I. — Benjamin John Coleman wants to ban payday loans from Rhode Island because he knows what it feels like to be desperate enough to take one out.

Even though he never had a payday loan.

Coleman, who has been in recovery for four years, said he turned to short-term credit six years ago to simply get money for drugs. "I didn't care what the interest rate was," he says.

His credit fix was a title-loan on his home, a camper trailer. He lost the trailer, but eventually turned his life around. Now Coleman helps other people who are trying to recover from drugs — and works on getting rid of what he considers another addiction: payday loans. He is a volunteer who helps update the website RIPayday.org, an organization seeking to ban payday loans from Rhode Island.

But not everybody who uses payday loans is desperate. In tough economic times, more people are turning to payday loans for temporary help — even if they have good salaries. A recent survey by Think Finance found Millennials making between $50,000 and $74,000 were 7 percent more likely than Millennials who made less than $25,000 to take out a payday loan.

What Coleman is hoping to do in Rhode Island has already happened in other states. Arizona's effective ban on payday loans went into effect in July 2010, for example. Santa Clara County, Calif. limited the number of payday loan stores in May.

But not everybody is opposed to the loans. The Pennsylvania Senate is considering legalizing payday lending after approval by the State House. By comparison in Utah, according to the Department of Financial Institutions, lenders can't allow a rollover of a loan beyond ten weeks from the initial execution date of the loan. Borrowers can make payments on loans in $5 increments or more without incurring any additional finance charges.

THE CYCLE OF DEBT

At the center of the debate is what critics call the payday loan debt cycle. It works like this: People don't have enough money to pay their bills so they take out a payday loan. When they get their next paycheck, they pay back the entire loan plus fees that are equivalent to triple digit annual percentage rates. This, unfortunately, leaves them without enough money to pay their bills, so they take out another payday loan. Wash. Rinse. Repeat.

But is this a situation unique to just payday loans?

Richard W. Evans, an assistant professor of economics at BYU, who says he did some consulting work for payday lenders back in 2009 and 2010, doesn't think so.

"You do see people abuse these loans," Evans says. "But that is not specific to the payday lending industry. You can find people who 'can't handle their liquor' in mortgage markets, in credit card markets — in any debt market you have people who over borrow."

NOT THE POOREST

Here is your typical person who takes out a payday loan according to the Consumer Federation of America's national expert on payday lending, Jean Ann Fox: They have a low to moderate income. They have to have a bank account to be eligible for the loan. They have to have a source of income. "Consumers who use payday loans are not the most destitute in society," Fox says. "They are banked and they have a source of income."

Why are they taking out the loans?

Nathalie Martin, a professor at University of New Mexico's School of Law, and an expert on consumer law, bankruptcy and predatory lending products, says her studies show most people are taking out payday loans not for emergencies, but for regular monthly obligations. "It just creates a situation where next month or two weeks from now they have another bill to pay," she says. "I think people are far better off without this type of credit."