782% APR- What A Deal!

So there has been quite a fuss over this nationally, but I thought I would talk about it just because it DOES effect us locally as well.  Payday loans involve using a check as collateral for a loan for the time period between one paycheck and the next.  These are primarily used because they require no credit check and loans can easily be given without regard to the borrower’s ability to re-pay.  While these are NOT related to mortgage loans, they are related to predatory lending and the several different ways you can get yourself into financial trouble if you aren’t very careful.  To get a payday loan, a borrower provides a personal check to the lender including $15 in interest for every $100 borrowed. As the Virginia Organizing Project puts it best, “Loans of 15% each week means that the lenders are charging interest at an annual rate (APR) of 782%.  Even for a two week loan the APR is 391%.”  The excuse behind the continuance of these loans?  The lenders claim that this is the only source of “emergency money” for people who wouldn’t have the creditworthiness to get it otherwise.  A more likely cause?  It is probably same to say that many of our legislators receive generous contributions from these lenders.

What does 391% APR look like?  If you borrow $500 for 52 weeks, you would pay back $1955 in interest plus the original $500 for a total of $2455.

On the other hand, 36% APR would look like this; Borrow $500 for 52 weeks and pay back $180 in interest for a total of $680. 

With the efforts in Charlottesville towards Affordable Housing, it is certainly worth mentioning affordable lending and borrowing and making an effort towards educating people in the many different ways that predatory lending can creep into their their lifestyles and pocketbooks.  My ultimate job is to help put people into their homes, but there is also a responsibility to help educate people on the different circumstances that might keep them out! 

Some interesting things to know;

• Since 2002 almost 800 offices of payday lenders have sprung up in Virginia, more than twice as many McDonald’s and more than three times as many as Starbuck’s.
• The Center for Responsible Lending reports that 99% of payday loan customers are “chronic borrower’s.  Only 1% of borrowers pay their loan back at the time of their next payday and don’t take out another.  
• Maryland, West Virginia, and North Carolina all prohibit these loans- Virginia hasn’t yet committed to this.  If such loans were prohibited, we would expect to see a return to the 36% cap on interest under usury laws that apply to other loan institutions. 

Want to help?  The Virginia Organizing Project suggest you contact your local Delegate and  Senator in the VA General Assembly and ask for their support in repealing the Payday Loan Act during the 2008 General Assembly Session. Here in Charlottesville it is expected that David Toscano is on board with repealing this act, but Rob Bell could use some persuading.