Payday loans have many financial experts and consumer advocates concerned about people getting trapped in debt. Payday lenders have "created a business model that’s completely dependent on what they themselves say is ... abuse,” according to Uriah King, vice president of the Center For Responsible Lending.
The lenders argue that their terms, such as a $19 fee to borrow $100, are cheaper than the late fees associated with credit card bills or utility bills; but over a full year, those fees can amount to rates of 500 percent or more annually. “If people were truly just taking out one or two [payday loans] a year, I don’t think this issue would be getting a lot of attention,” King said. “The average payday borrower is in (payday loan) debt a couple hundred days a year.”
Robbie Thompson, president and CEO of the Credit Union Association of the Dakotas, says many credit unions offer some of the same services as payday lenders, which may be an alternative to the risky loans. Eighteen states and the District of Columbia have banned the loans or capped their interest rates.
In South Dakota, State Rep. Steve Hickey (R-Sioux Falls) is attempting to crack down on them there. He used a coalition of backers and a poll to win approval for an initiated measure asking voters to cap interest rates to 36 percent. Lobbyists and executives approached Hickey with a proposal to support him in trying to pass less drastic regulations and reforms if he would relent on the rate ceiling, to which he agreed. Hickey said that two reforms would include a “right of rescission,” which would allow payday borrowers to change their minds shortly to get out of the loan without penalties, and a central registry of loans.