Those behind simultaneous protests in six cities across Kansas calling for payday loan reform should be commended. Over the course of a single Tuesday, they successfully focused attention on an issue that many of us simply pass over.
In essence, these short-term loans allow those making them to charge large amounts of interest that burden people least able to pay. A loan meant to cover only a week or two is extended by a month, or two months, and eventually interest charged overtakes the paltry principal.
As The Topeka Capital-Journal’s Tim Carpenter wrote, “The Kansas bank commissioner’s office reported that in 2018 about 685,000 title or payday loans were made with a value of $267 million. In Kansas, a company can legally charge interest sufficient to transform a $300 loan into a $750 obligation in five months.”
Annie Ricker, pastor at Berryton United Methodist Church, was part of the Kansans for Payday Loan Reform protest and said that the groups wants “Kansas to reform its laws to ensure that, one, people have enough time to repay the loan in affordable installment plans over months not weeks. And to limit the amount to no more than 5% from each paycheck.”
That sounds good. But we’re hesitant to call for sweeping changes without knowing more and examining the issue from all sides.
Put simply, those using payday or car title lenders tend to be bad credit risks. That’s why they’re not accessing a loan from a bank or even using a credit card. It may be that payday lenders are exploitative, but post reform, what kind of financial services will these borrowers be able to access? Could they turn to even riskier and illegal forms of lending?
It strikes us that payday loan reform — while potentially beneficial — pushes past some real issues that could be addressed first. For example, financial literacy should be taught and emphasized in schools. People should understand the very real challenges and costs posed by payday loans. Disclosure and transparency from the lenders could be strengthened, so borrowers truly understand what they’re getting into.
Also, Kansas should really take steps to address the fundamental drivers and causes of poverty. If substantial numbers of state residents need these financial products, what has brought them to that point? Could it be arduous state restrictions on public assistance programs?
Without addressing these questions first, payday loan reform may be simply addressing a symptom, not the actual problem.