More than 45,000 people in Utah who took out payday loans last year were unable to pay them off within the agreed-upon time frame, a stunning number, but one that shouldn’t be surprising given two factors. First, payday lenders thrive by luring customers into a cycle of perpetual debt and, second, they can get away with it under Utah’s relatively lax regulations.
There have been some successful efforts at the legislative level to increase oversight of the burgeoning storefront loan industry, including a measure passed last year to require lenders to disclose rates of default. As a result, we now know that about a third of people who take out payday loans fail to pay them off after the 10-week period in which they can be “rolled over” following an initial two-week term. Critics of the industry say the data prove the companies deliberately entice borrowers into a “debt trap.” The industry counters that the numbers show the majority of customers are indeed able to pay back the loans and aren’t in over their heads.
Thirty-six states currently allow storefront payday loans and of those, all but seven put some cap on how much interest the lenders can charge. Utah is one of the noncap states, and because of that, lenders here charge an average of 482 percent annual interest. There have been loans made in Utah with annual rates as high as 1,564 percent. In states with the most restrictive regulations, the average rates are around 250 percent, according to a study by the Pew Charitable Trusts.
The study also shows that in “permissive” states like Utah, more people tend to take out payday loans than in states where rate and fee caps are in place. All of this speaks to the need for our Legislature to consider the kinds of regulations embraced by neighboring states like Colorado and Wyoming, which have lower-than-average rate caps. But it also speaks to the lobbying clout of the payday loan industry, which has been known to shower key politicians with healthy campaign contributions. In fact, the involvement of payday lenders in the scandal that led to the resignation of former Attorney General John Swallow helped propel forward the legislation requiring more disclosure.
What is now needed is regulation, previously proposed, that would restrict the number of payday loans a customer can take out at a given time. Such a restriction would prevent companies from encouraging customers to borrow still more money to pay off previous loans. States with such restrictions report a default rate of about 1 percent, compared with the default rate here of 30 percent or more.
Another previously proposed measure, which has since been adopted by the Legislature, puts a 10-week cap on accruing interest or fees. If a customer doesn’t repay a loan in that time frame, there would be a period in which he or she could pay down the debt without being charged additional interest.
Members of the Legislature who advocate for stricter regulation of payday lending have been beaten down by the influence of the industry and a general antipathy toward creating a new layer of government regulation. But the terms offered by short-term lenders can reasonably be regarded as predatory and are deserving of appropriate regulation to help borrowers avoid entrapment in a cycle of indebtedness.