Interest rates reach nearly 700% in some states as debate over how to regulate payday loans continues

Asha Clark doesn’t have any savings. She works full-time. She earns a minimum wage, making phone calls as a customer service representative. In Las Vegas, Nevada, where she lives, that’s $8.25 an hour. Sometimes, her paycheck isn’t enough to cover all her bills. Those are times that Clark would take out a payday loan.

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In Nevada, there are more payday lenders than Starbucks and McDonald’s restaurants combined. They provide short-term loans that are meant to be repaid in full when the borrower gets their next paycheck. Each loan comes with fees – for example, about $75 in fees for a $500 loan. The trouble is that when borrowers like Clark get their check and spend most of it repaying the loan, they end up short on cash again. And so they take out another payday loan. Next payday, the same thing happens. The borrowers roll over that same $500 loan every two weeks, each time paying the fee. Over the span of the year, the fees alone can be as much as seven times the size of the original loan.

It’s those fees that got Clark in trouble. The payday lender was automatically deducting the fees from her checking account every two weeks, but the money wasn’t there. That triggered overdraft fees.

“Then they tried to run it again and then you get another overdraft fee and then the remaining checks bounced,” said Clark. “So I had to close the bank account down … and stop paying the loan altogether.”

Now Clark, 39, is without a checking account, has bad credit and doesn’t qualify for a credit card. All she has is a prepaid debit card.

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Back in 2016, scenarios like this led the Consumer Financial Protection Bureau (CFPB) to propose a rule that would require payday lenders to find out if their customers had future income to pay off the loan. Under that rule, lenders would have to notify the borrowers before first attempting to take money out of their checking accounts. And if the money wasn’t in the account, they would only be allowed to make two consecutive attempts to withdraw the money before having to get permission for more withdrawal attempts. Also, borrowers who took out three loans in a short period of time would be required to go through a 30-day “cooling-off period” before being able to take out another loan.

The rule never ended up going into effect, delayed by Donald Trump’s administration. Now, parts of the rule are being rolled back by the recently confirmed CFPB director, Kathy Kraninger.

The partial rollback of the proposed rule was welcomed by the lender community. And according to a statement issued by the Community Financial Services Association of America, they are still pushing for a complete rollback.

Payday lenders don’t appreciate being cast as preying on borrowers and often defend the high interest rates they charge. Their argument is that they are filling a hole in the market, loaning money to those who can’t get it through traditional channels. And since those borrowers tend to be riskier, their loans have to come with higher interest rates or fees.

Recently, the Center for Responsible Lending tracked how much borrowers end up paying in fees and found that in some states, interest rates on payday loans reached nearly 700%. In Texas, borrowers paid on average 662%. In Nevada, that number was 652%, and in Kansas 391%.

The proposed rule was expected to bring those numbers down.

“When the rule was finalized, in November of 2017, we estimated that it would save Texans over $400m compared to current market practices, by limiting refinances and ensuring more affordable loans,” said Ann Baddour, director of fair financial services at Texas Appleseed, a public interest justice center.

While the debate over how to regulate payday loans continues in Washington DC, states are taking the matters into their own hands. Some have banned payday loans while others have capped annual interest states.

The same day that the CFPB announced rollback of the proposed payday loans regulations, Nevada lawmakers introduced Assembly Bill 118, which would cap payday loan interest rates at 36% a year.

I went to my bank and got a personal loan from them to pay that loan off. I was like: ‘I can’t keep paying $800 a month per loan' Jennifer Ladd

While borrowers welcome regulation of payday loans, they wish that lawmakers would also try to come up with alternative loan solutions.

For years, Jennifer Ladd used to take out $500 payday loans and pay the $75 in fees every two weeks. Then one day, an emergency struck and she needed more money than that.

“I saw on TV this ad: ‘Call this number! You will qualify!’ And sure enough I got suckered into it,” said Ladd, 42, who lives in Kansas and works as a paramedic.

For about two years, she kept making payments each month and felt like she was getting nowhere.

“I went to my bank and got a personal loan from them to pay that loan off,” said Ladd. “I was like: ‘I can’t keep paying $800 a month per loan.’ Fortunately they were like: ‘Absolutely, let’s help you get you out of this.’”

Her bank helped her pay down the loan and also shut down her checking account, but not before the payday lender tried to convince them to keep it open. In the end, Ladd said she paid about 250% interest on that loan.

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According to Ladd, the best thing lawmakers could do is to raise wages. “Bottom line is wages have to go up,” she said. “People are not getting paid enough.” In Kansas, minimum wage is $7.25 – same as the federal minimum wage, which has been stuck there since July 2009.

Clark, who earns a minimum wage in Las Vegas, says: “That’s not enough to have a decent living. You definitely need a second income or some type of support system to be able to live and survive.” But she has no second income, no savings and is just one emergency away from finding herself in need of cash.

When asked if she would take out another payday loans, Clark hesitated.

“I want to say no, I wouldn’t get one, because like I said, the interest rate is too high and then in the future, it messes up your credit,” she said. “It goes on your credit report. It can be reported to a collection agency if you still end up owing. So now I would say no but who knows what the near future would bring.”

But if she found herself in real financial hardship again, she said there is a good chance she would do it anyway. The high interest rates weren’t enough to deter her last time, either.

“At the time, I was facing homelessness,” said Clark. “I didn’t have a job, the rent was due and I had a five-day’s notice. I was trying to save my apartment … So, at that time I wasn’t concerned about the interest rate.”

