Shaddy: Payday loans only temporary fix

By By Aaron Shaddy

By Aaron Shaddy

Bankruptcy is on the rise in Utah.

Figures from the U.S. Bankruptcy Court for the District of Utah show a 41 percent increase in filings this spring compared to the same time in 2007. Also on the rise are applications for payday loans.

“There are many more people coming in,” said Jessica Smith, an employee at a Money 4 You store in Sandy. “Single moms, lower-class, middle-class people, some immigrants. Just about every type of person.”

As the economy reels, many people are in need of some fast cash, and payday loans offer it to just about anybody.

The loans seem innocuous enough-1st Choice Money Center in Salt Lake City reports that in June, 89 percent of loans were paid off on time. All of those loans incurred a 10 percent weekly interest rate, with the majority of those people earning a middle-class income of some $2,000 a month.

At first, the loans appear to be healthy manifestations of a free market-people choose to borrow money until their next paycheck and pay $10 for every $100 they borrow. However, delinquency can quickly cause problems.

The loans can have extortionate interest rates, causing debt to cascade into nightmarish proportions if not immediately paid off. The Center for Responsible Lending, a nationwide consumer advocacy group, puts the average payday borrower as paying $800 for a $325 loan.

Utah is particularly at risk here. Although we have a culture that puts a high premium on saving and living within one’s means, we have ranked consistently high in bankruptcy filings, according to a 1999 report released by the U.S. Department of Justice.

In 2004, the American Bankruptcy Institute ranked Utah first in households per filing, with one of every 41.68 families unable to pay its bills-a quality that does not endear itself to the responsible use of payday lenders.

Payday loan advocates point to Utah’s long history of bankruptcy as predating the emergence of their stores, the first of which arrived in 1984. Although it would be inaccurate to say payday loans are causing bankruptcies, they certainly are not helping.

Because Utah lacks a usury limit, lenders can charge whatever interest they see as competitive, and the interest rates here are much higher than elsewhere, with virtually every store offering a whopping 521 percent annual percentage rate. Connecticut, Texas and Ohio offer capped rates at 30, 48 and 28 percent respectively. We need some regulation.

The free market has not led Utah to lower interest rates. Utah has among the highest average APRs on payday loans in the country. Although seen by many as a way out of an emergency, the loans are at best only temporary fixes.

One cannot get out of debt by getting into more, and so payday stores cannot, by definition, be of long-term benefit to those strapped for cash.

Many states, most recently Ohio, have put an end to this predatory practice by placing caps on interest rates at more reasonable double digits. We would do well to follow their lead and let people put their money toward better investments rather than earning more debt.

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