Families can avoid financial traps at Christmascomment (1)
December 5, 2013
Her child’s friend had recently gone on a memorable vacation. Knowing she couldn’t afford it but still desiring to provide that same experience for her own children, the woman decided to obtain a payday loan to help fund a family vacation.
When later sharing her story, the woman said she was blinded by the thought of how happy her children would be if she could just provide that vacation for them.
“She had such strong regret for trying to do something good for her children but locking them into a devastating cycle of debt,” said Stephen Stetson, policy analyst for Arise Citizens’ Policy Project (ACPP).
It’s a similar story Stetson says may be happening currently as people talk about wanting their kids to have a happy Christmas.
ACPP — a statewide, nonpartisan coalition that promotes public policy benefiting low-income Alabamians — and its sister organization and lobbying arm Alabama Arise as well as Alabama Citizens Action Program (ALCAP) are concerned.
“We believe that poverty is caused by decisions made by policy makers, and the decision to allow low-income people to be able to borrow high-interest loans is one of the things that is driving people into poverty and keeping them there,” Stetson noted. “The existence of high cost loans in Alabama is one of the structures that creates and perpetuates poverty, so that’s why it’s … part of our mission to address this.”
Stetson said the main elements that distinguish “predatory loans from a bank or a credit union loan” are the high interest rate and the fact that the lender doesn’t investigate the ability of the borrower to repay.
That’s a huge problem, he noted.
“It’s very important that the borrower be able to pay back the loan — that you not give somebody a loan that they can never repay,” he said.
Stetson said they are concerned about two types of loans: payday loans and auto title lending. “They are both considered usury — they’re both triple-digit interest loans,” he noted.
According to Stetson, a payday loan is a two-week loan for under $500. The customer secures the loan with a personal check for $17.50 for every $100 borrowed, he said.
“The idea is that at the end of two weeks, if I don’t come back in and pay back the loan, you can cash the check,” he said. “The interest rate on these loans is 456 percent — that’s the maximum legal amount and everybody (who) offers these … charges the maximum.”
And while some take out a payday loan for a small amount of money, Stetson noted others are turning to auto title loans for larger emergencies.
“Just like you have to have a checking account for a payday loan, you have to own your vehicle title” for an auto title loan, he explained. “But this is like a pawn; in fact it’s governed by the pawn shop statute. The same way you’d pawn a household good … that’s exactly what you’re doing with your car title.”
An auto title loan is a 30-day loan, and there’s no maximum amount, Stetson said. In practice, the borrower receives about half of the Blue Book value of the vehicle, he said.
“You leave them the (car) title and you get to drive away with the car,” he explained, adding one of the characteristics of this loan is that when it isn’t paid back, the auto title lender can repossess the vehicle.
“Because you were in a desperate financial situation, you have not only taken out this loan with a 300 percent interest rate, but if the car gets repossessed, you no longer have a way to go to work,” Stetson said. And in Alabama the lender is able to keep all of the proceeds of the sale of the vehicle, not just the amount the borrower owed, he added.
According to Stetson, payday and title loans don’t exist in 17 U.S. states that have put interest rate caps on these small consumer loans.
“Our idea was that in a world where they pass interest rate caps, people still have availability of credit but at a reasonable interest rate,” he said, noting this has been ACPP’s approach at the statehouse.
Melissa Oliver, legislative coordinator for Alabama Arise, said they proposed legislation last year and found a “great deal of interest among the representatives and senators.” But she added that the legislative process can be cumbersome and “there are a lot of lobbyists for the payday loan industry.”
She noted one bill was assigned to a subcommittee. “Another effort we had was not brought up on the floor to be discussed. The votes were not there to pass it,” she added.
“We think that people need to be aware of what payday lending is and who it affects and who is involved, and hopefully as people get involved in (the) political season next year, they will ask people, ‘How do you feel about this?’” she said.
ALCAP also “is working with other organizations to try to get legislation passed to protect consumers,” said Joe Godfrey, ALCAP’s executive director.
Godfrey cited specific Scriptures that address usury, including Exodus 22:25–27 and Ezekiel 22:12. “The point that’s being made in all these passages is that people ought to be treated fairly,” he said.
“Our hope is that Christians and churches will talk to their legislators and let them know of their concern about this issue and that they hope something will be done to regulate the industry and protect the borrowers from exorbitant charges and often deceptive practices,” Godfrey added.
And as some people may be facing financial burdens this Christmas season, Godfrey would want to encourage them and offer some suggestions.
First “try to find a way to live within your means,” he said. “Whatever income you have or … job you’re able to secure, try to find a way to live on what you’re bringing in and not have to borrow. … If that means giving up cable TV, selling off possessions … try to do everything you can to avoid borrowing to get yourself through those situations.”
And second “if you do have to borrow, borrow from a reputable lending institution,” Godfrey noted.
He also encourages churches and associations to work together in finding alternative ways to assist families, particularly during this time of year. If churches and associations could help, these families and individuals might not feel tempted to turn to payday and title loan businesses for financial help, he noted, adding that financial counseling should be an important part of that assistance.
Stetson added that depending on where a person lives in the state, there are faith-based providers of small dollar loans. “Different communities and … churches have different things available,” he noted.
Planning and thoughtfulness go a long way in meeting the family budget for any purchases, especially at Christmas when the incentives to spend are especially high, he said.