Perhaps there's a nifty free-market case for letting payday loan outfits charge any interest rate they want. Willing creditors contracting with willing debtors—that kind of thing. But there's a word for what these payday loan joints are practicing. It's usury, and the practice is increasing in Oregon.
That's because Oregon is one of only eight states without fee caps for payday loans. It's one reason you've likely seen more payday loan stores here. In fact, between 1999 and 2003, there was a 138 percent jump in the number of payday loans and a 236 percent increase in the value of the loans in Oregon.
California caps payday loans at 15 percent of principal. Washington caps them at 15 percent of principal for the first $500 and 10 percent for any portion of the principal over $500. This is one industry, at least, that has an incentive to settle in Oregon.
But legislators, especially those who normally favor free markets and fear government regulation, should realize what Oregon's freewheeling payday loan industry is doing to the state's poor. They should abandon a kind of devil-take-the-hindmost conservatism and pass Senate Bill 545's modest reform of this industry.
"The problem with payday loans is that they prey on the poor and people who can't do math ... ," says Dave Ramsey, radio talk-show host, financial consultant and author. "It doesn't work for anyone who's not the owner. It's anti-consumer. It's oppressive to the poor, and it's morally wrong."
Here's how: A payday loan recipient takes out a $260 loan to deal with a setback. In two weeks, she can't pay back the principal and interest. So she pays the $57 interest charge. Two weeks pass and she still can't pay back the loan and pays another $57 in interest, and so on.
Six weeks into the loan, she has paid $171 and still owes $260 in principal. If there's a limit on the number of renewals or rollovers—and three is the current state limit—she'll likely go to another payday loan outfit to pay off the first loan. And on it goes.
Lorretta Moesta of the O.U.R. Federal Credit Union in Eugene says one woman had blown through nine payday loans.
"Once you get stuck in this, it's very difficult to get out," says Ramsey. "It's a mathematical death cycle."
Stupidity, desperation and predation contribute to this spiral for borrowers. "When you start talking about 400 to 800 percent annualized interest rates," Ramsey says, "stupid comes up pretty quick."
But it's a stupidity often born of desperation—a medical bill, bad budgeting—that payday loan outfits capitalize on at locations in poorer parts of town. They're preying on people who can least afford it, most often single moms.
Says Ramsey: "The thing that just angers me as a consumer advocate is that these are the very folks that don't need to be taken advantage of."
Ramsey's no bleeding heart. He's a tender-hearted but tough-minded adviser who's death on debt for every income group. He doesn't excuse payday borrowers for their role in their own financial woes. Although he favors SB545's cap on payday loan rates, he'd much rather legislators outlaw payday loans outright, as has been done in Georgia.
But what would strapped folks do without them? What they did before the explosion of payday loan shops. "What the rest of us do" -- or should do, says Ramsey: Sell stuff at a garage sale, not buy things you can't afford, learn to budget. For insights into his debt-free way go to, look at www.daveramsey.com. Or read "The Total Money Makeover."
"One of the best ways to not be poor," he says, "is not to borrow money at 400 percent interest."
It's too bad Oregon is not moving to ban these loans, but it's worse than that. SB545's proposed cap on interest rates and limits on loan amounts could be in trouble. The industry's trying to gut the bill. "They have a lot of bucks," Ramsey says. "They took them from poor people."
Legislators who are rightfully wary of increased regulation should consider a couple things. Government already caps rates for other products—credit cards and other bank loans. Also, capping or ending payday loans would have other benefits that fiscal conservatives might like, keeping the working poor from going into bankruptcy or the state's welfare offices.
That is, if simple revulsion at the notion of triple-digit interest rates and preying on single moms isn't enough to justify an exercise in "compassionate conservatism."
David Reinhard
