Thursday, March 27 2014 1:41 PM EDT2014-03-27 17:41:48 GMT
A grassroots group of community and faith leaders announced Tuesday that they will ask Missouri voters to approve a measure capping the rate of interest charged on payday loans at 36 percent. Consumers now can pay up to 1,950 percent interest.More >
KANSAS CITY, MO (KCTV/AP) -
About half of all payday loans are made to people who extend the loans so many times they end up paying more in fees than the original amount they borrowed, a report by a federal watchdog has found.
The report released Tuesday by the Consumer Financial Protection Bureau also shows that four of five payday loans are extended, or "rolled over," within 14 days. Additional fees are charged when loans are rolled over.
Payday loans, also known as cash advances or check loans, are short-term loans at high interest rates, usually for $500 or less. They often are made to borrowers with weak credit or low incomes, and the storefront businesses often are located near military bases. The equivalent annual interest rates run to three digits.
The loans work this way: You need money today, but payday is a week or two away. You write a check dated for your payday and give it to the lender. You get your money, minus the interest fee. In two weeks, the lender cashes your check or charges you more interest to extend, or "roll over," the loan for another two weeks.
The CFPB report was based on data from about 12 million payday loans in 30 states in 2011 and 2012. It also found that four of five payday borrowers either default on or extend a payday loan over the course of a year. Only 15 percent of borrowers repay all their payday debts on time without re-borrowing within 14 days, and 64 percent renew at least one loan one or more times, according to the report.
Twenty-two percent of payday loans are extended by borrowers six times or more; 15 percent are extended at least 10 times, the report found.
"We are concerned that too many borrowers slide into the debt traps that payday loans can become," CFPB Director Richard Cordray said in a statement.
Some states have imposed caps on interest rates charged by payday lenders.
The industry says payday loans provide a useful service to help people manage unexpected and temporary financial difficulties.
There is a 36 percent cap on the annual interest rate that military family members can be charged.
Missouri has among the weakest laws and regulations in the United States. As a result, payday loan lenders dot Kansas City. There are four payday loan lenders on one block in Kansas City.
In Missouri, the storefront lenders can charge as much as 1,950 percent interest. In Missouri, the average interest rate for a payday loan is 445 percent annually.
One woman paid more than $1,000 to repay a $300 loan, a KCTV5 Investigation revealed.
The Missouri Senate has passed a bill to reform payday loan laws. The House will now consider the bill, which would prevent payday lenders from rolling over loans multiple times when borrowers are unable to pay.
Susie McGee said she doesn't use them.
"I think they're nice for people who really need them, but I also think they are a big rip-off," McGee said.
Michelle Stone supports tougher regulations.
"Payday loans are robbery. They shouldn't have them. They don't help you. They hurt you," Stone said. "You borrow $150 and end up paying three times that."
John Miller said the bill passed by the Missouri Senate is portrayed as reform, "but it's not." Miller, who is an attorney and volunteers with Communities Creating Opportunities, said stopping rollovers does nothing if people continue to open new loans.
He said the working poor and others use payday loans to get by when emergencies like car or home repairs come up, but limits are needed. Miller said Missouri lawmakers should impose the same cap that the federal government has on military families.
"The only true reform would be to cap the rates at 36 percent," Miller said. "That's the normal and just thing to do."
The pending legislation is Senate Bill 694.
Copyright 2014 KCTV (Meredith Corp.) and Associated Press. All rights reserved.
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