Many consumers who take out a payday loan are put into even worse circumstances when forced to pay back more than they borrowed, according to David Gray, a policy analyst for the Louisiana Budget Project.
A borrower who takes out a $100 loan ultimately will pay $270 -- often because he or she has to take out another advance to pay off the first, racking up additional interest and fees. Payday loan outlets are most often found in lower-income areas or predominantly African-American neighborhoods, offering loans with interest that equates to an annual percentage rate of 782.
In Louisiana, state law sets a maximum 16.75 percent fee, or up to $45, and a loan limit of $350. Interest rates are capped at 36 percent per year and drop down to 18 percent if not paid off in a year. Lenders can assess fees for delinquent payments, and most require borrowers to provide access to their bank accounts to make sure loans are paid on time. This can lead to a shortage of funds to pay for necessities, forcing borrowers to take out additional payday loans. Gray says research shows that people who were turned away for a payday loan because they did not have a regular paycheck “in the long run were financially better off,” and received help from churches, relatives, or social-service agencies. Utility companies and medical providers may allow consumers to pay off bills over time without going into debt. The Louisiana Budget Project is encouraging the Legislature to consider changing state law to further restrict lenders.