The number of Coloradans who are having trouble making it from paycheck to paycheck is rising, and it’s a trend with alarming implications.
Last year, nearly 250,000 Coloradans (roughly 8 percent of adults) borrowed almost $500 million from “payday” lenders, coughing up some $84 million in interest for the convenience. The number of people using such loans increased 34 percent from 2004 and 101 percent from 2001.
Payday loans are typically cash advances given in exchange for a postdated check the lender can’t cash until a certain date, usually the borrower’s next payday. That check has to include both the amount loaned and the interest.
In Colorado, the maximum individual payday loan is $500, can’t run more than 40 days and carries a cost of $75. (That’s 15 percent simple interest, but more on interest later.)
Stevens Inc., an Arkansas investment bank that tracks the industry, estimated that in 2003 the industry generated $6 billion in revenue from $40 billion in loans to about 14 million U.S. households. Given the growth in Colorado, it’s a reasonable assumption that current national figures are higher.
The growth of the industry is based on such factors as banks getting out of the small-loan business and passage of laws allowing the practice by many states in recent years. Payday loans didn’t even exist (as an industry) before 1993, but now there are more than 22,000 such lenders nationwide, with the field dominated by about a dozen companies. Some companies finance their business with lines of credit from mainline banks.
In Colorado last year, the average loan was about $300, with an 18-day term and an average annualized interest rate of 345 percent.
Consumer advocates are concerned about those high interest rates, and about the fact that some borrowers can’t pay off loans and so get new ones to cover previous loans in what’s called a “roll-over.” According to the recent annual report from the attorney general’s office, about 15 percent of Colorado payday borrowers had 13 or more loans in a year, meaning they were in debt for at least six months.
The industry defends payday loans as a tool for people who can’t otherwise get credit and as a sometimes-cheaper choice than returned-check charges, bank line-of-credit fees or credit-card interest.
Colorado passed legislation regulating the industry in 2000 and 2004, but some experts think the laws tilted the playing field too much in favor of lenders. The rapid growth of the business alone merits a look by the 2007 legislature as to whether state law provides the appropriate balance of consumer choice and borrower protection in regulating payday loans.
