The effort to expand payday lending in Pennsylvania may be over for this year, but the measure is too lucrative to lenders for it to be declared dead. Consumers must make sure state lawmakers don't revive it next year.
The short-term lending industry offers a dangerous combination of easy access to money at astronomical interest rates. A study by the Pew Center on the States showed that 5.5 percent of adults nationwide have used a payday loan in the past five years, with the average borrower taking out eight loans a year and spending $520 on interest on an average loan of $375.
Although advocates for legalizing payday lending claim the short-term borrowing helps people get through tough, unexpected financial setbacks, the Pew survey refuted that. The report says that 69 percent of borrowers use the loans to help them cover everyday expenses such as utilities, credit card bills, rent, mortgages or food.
Individuals who are struggling from paycheck to paycheck are susceptible to falling behind in repaying their loans as well, triggering a costly cycle of more borrowing.
Proponents of House Bill 2191, which narrowly passed the House in June, say the measure would allow the state to more closely regulate the industry. Short-term lending is legal but, because the state caps interest at an annual rate of about 24 percent, storefront lenders found the businesses unprofitable.
Under the bill, the interest rate on the short-term loans would be capped at 12.5 percent, plus a $5 fee per loan. That may not sound high but, because the loans are issued for short periods of time, typically two weeks, the 12.5 percent rate per loan is equivalent to an annual rate of more than 300 percent. That's significantly more than even the most expensive rate for a cash advance on a credit card.
Lenders were putting pressure on the Senate up until last week, and they'll be back at it next year. Lawmakers should be looking out for consumers instead. Pennsylvania is among 15 states with the most restrictions on payday lending, and the state Senate should keep it that way.