Last week, a co-sponsorship memo regarding the legalization of a new loan product, the “Pennsylvania Financial Services Credit Ladder,” began circulating in the State Senate. This product would essentially allow payday lending in Pennsylvania under Consumer Financial Protection Bureau’s (CFPB) proposals.
A payday loan is a small, short-term loan typically due on the borrower’s next payday. Instead of specific assets, the borrower is required to provide the lender access to their bank accounts as collateral, forcing repayment to take priority over important living costs such as rent, health or childcare. Interest rates for payday loans are much higher than secured loans, easily shooting up to triple digits (300-400%).
The payday lending industry argues that high rates are necessary as conventional interest rates for lower dollar amounts and shorter terms are not profitable. However, there is no definite way of calculating the annual percentage rate (APR) that is used in turn to calculate interest rates, therefore too often leading to hidden fees and unreasonably high interest rates.
In the U.S., it has been left up to the states to regulate this type of lending, with many choosing to prohibit or highly regulate payday lending. Regulation is necessary not only because of the predatory nature of payday loans, but because of the clear effects of payday loans on external parties: due to the decision of a borrower to take out a payday loan, other lenders are less likely to be paid back and the borrower’s family and children are left with fewer resources. Studies have shown that communities with payday loan storefronts report strains on local food pantries and emergency relief services. Worst of all, many borrowers who take out payday loans find themselves in a debt spiral in which they begin to take out loans in order to pay back loans.
Up until now, Pennsylvanians have benefited from one of the nation’s strongest regulations against payday loans – so strong that, in fact, most of the industry would rather not open its doors in the state than abide by the regulations. The proposed legislation would weaken Pennsylvania’s consumer laws because there is no effective cap on finance charges (one of the ways to introduce hidden fees and inflate interest rates).
The coalition Stop Predatory Payday Loans in Pennsylvania has put together a one-pager on this legislation, including sample language for contacting your legislators. This is not the first time that payday lenders have looked for ways to re-enter our state. It is only continued action by people like you that has prevented similar bills from passing. Please contact your legislators today.
If you are interested in more opportunities to take action like this one, please email us at firstname.lastname@example.org to sign on to our asset-building coalition, Pennsylvania Opportunities PathWay.