One of the Conference’s legislative priorities is safe and fair lending practices. As Pope Francis states, “The dignity of each human person and the pursuit of the common good are concerns which ought to shape all economic policies.” The payday loan or “delayed deposit service” business has gained attention in the past years as an industry that exploits borrowers with deceptive marketing and draws them into a perpetuating cycle of debt.
Payday loans are typically small-dollar loans, which in Iowa are limited to $500, made with a simple, fast application process and without credit checks or verifying the borrower’s ability to repay the loan amount. The collateral for the loan is the borrower’s next paycheck, commonly provided by giving the lender electronic access to their checking account or writing a personal check for deposit on the next pay day. The repayment includes the interest charge, which in Iowa is limited to $15 for the first $100 of each loan, and $10 for each additional $100. The loan term is limited to 31 days and roll-overs, where borrowers pay a fee or the interest on a loan to extend the due date, are prohibited, but lenders are allowed to make a new loan the same day a borrower repays a previous loan.
Unfortunately, the straightforward provisions that regulate the delayed deposit services business in Iowa often obscure the economic reality of the cycle of debt that can trap thousands of borrowers across the state every year. According to the Iowa Division of Banking, in spite of the advertised headline rate of interest, the annualized percentage rate (APR) on the average payday loan was 268 percent in 2013, meaning a interest charge of $268 for a loan of $100. The threat of a perpetuating debt cycle becomes even more clear in view of the fact that 80 percent of the payday loans in the state are renewed or followed by another loan within 2 weeks and 53 percent of payday borrowers take out 12 or more loans a year. The opportunity for convenient access to individual loans is compounded by the expansion of the payday industry in Iowa, which had 209 payday loan storefronts that made over 950,000 loans in 2012.
The profile of the payday borrower is commonly a person who is using the payday system to pay for regular, ongoing living expenses like rent, credit cards and utilities, and the consequences of the high-expense debt spiral can quickly extend to their families as diminished household budgets and interventions by extended family to pay off accumulated debt. For many families already at risk of financial crisis, the payday cycle dramatically increases the likelihood the risk becomes reality.