Why we oppose the car-title loan bill
By Mike LaFontaine
If you’ve noticed the New Hampshire Community Loan Fund’s public policy work, you may wonder why we have been so outspoken in our opposition to so-called “payday loans.” After all, the Community Loan Fund doesn’t make personal loans, so why get involved?
Most recently, we asked the legislature to uphold Gov. John Lynch’s veto of Senate Bill 57. This bill would repeal recently enacted state laws that strictly regulate car title loans (payday loans that use the family or business automobile as collateral). The Senate voted this week to override the veto, so we're asking the House to reverse its previous vote and cast a vote for consumers.
Payday loans are personal loans (typically for amounts under $500) made to people who need money quickly and either cannot or do not want to get a bank loan. Sometimes called “emergency” loans because they are made quickly – typically as soon as the borrower fills out the paperwork – they are made without regard to the ability to repay.
The question of whether or not payday and car title loans should be banned outright or heavily regulated has been hotly debated in the last two legislative sessions. The Community Loan Fund hasn’t been shy about voicing our opinion on this question because the people who end up being hurt by predatory lending are overwhelmingly those who can least afford it. Whatever benefit some borrowers may get from having credit of this kind available, for many other borrowers these loans are disasters waiting to happen.
Advocates for strong regulation of these loans (or, in some states, an outright ban) make a compelling case that the industry is closer to a “debt trap” than a service industry. The mechanics of these loans – which are marketed as “user friendly” – are tailor-made to produce a spiral of indebtedness.
For example, if someone takes out a $500 car title loan at 25 percent interest per month, and repays $150 for four months, he or she will have paid back more than they borrowed in the first place – and still owe more than $350.
Contrary to their marketing, these are not short-term loans. Only 2% of borrowers pay their loan off when it first comes due because borrowers rarely have enough of their pay left at the end of the month, after meeting basic living expenses, to repay more than a fraction of the amount they borrowed.
The typically loan is rolled over eight times, and 90 percent of the industry’s revenue comes from these rollovers.
Although proponents of payday loans say that the state has no business deciding what’s right or nor right for borrowers, local welfare (ie, local taxpayers) often has to bail out borrowers bankrupted by a cycle of growing indebtedness they have no other way to escape.
The Community Loan Fund is in the business of teaching people how to use credit knowledgeably, in ways that increase their ability to become self-reliant. And to offer credit that makes it possible for the borrower to succeed. Done right, extending credit to people who need it can make an enormous, positive difference in their lives.
The business model of payday lending, on the contrary, depends on exposing a sizeable percentage of its customers to financial disaster. It’s a toxic mix of very-high interest rates, short terms for repayment and lending without regard to the borrower’s ability to repay (remember, the big money is in rollovers).
So, to answer the original question, we’ve weighed in on Senate Bill 57 because it would weaken the law enacted just two years ago to eliminate predatory forms of lending. We have lent more than $150 million to about 1,800 successful borrowers. Those loans were structured to leave the borrower better off after the loan is repaid. To help borrowers succeed, we have accompanied our loans with thousands of hours of education.
The passage and enactment of Senate Bill 57 will restore the kind of car-title loans, like payday loans generally, that do far more harm than good.
Mike LaFontaine is Director of the Community Loan Fund's Community Housing program.