Illinois
COMMENTARY

Payday loans too easy to get and too hard to pay off

Deferred payment transactions, more commonly called payday loans, allow people to receive short-term loans for small amounts of cash by borrowing against their next paycheck. Illinois is one of eight states that not only allows these loans, but puts no limits on the interest rates. The loans are easy to get but are often rolled over again and again. Even people with good jobs have been caught in this trap and unable to pay off the loan because interest rates can be as high as 200 to 500 percent.

Tootie Holmes

Some might see these loans as a service to those needing to pay for groceries, avoid bouncing a check, or pay bills when they are between paychecks. That's like saying loan sharks provide a service. Payday loans are really a "small print" loan trap that a surprising number of hardworking people have fallen into.

Traditional loan service providers like banks, credit unions and even credit card companies have to follow truth-in-lending laws, and interest rates are not allowed to reach loan shark levels. There are about 800 payday loan stores in Illinois and in May Gov. George Ryan signed the Consumer Finance Bill (S.B. 355) that simply directs the Department of Financial Institutions (DFI) to draft regulations to protect consumers from this predatory lending.

Unfortunately, consumer protection is not in place yet and we will not see anything happen until after the elections this month. The payday loan industry is growing rapidly with more than 8,000 payday lenders nationwide and if allowed to expand they could have $45 billion in loans by 2002. The payday loan companies say the risk they take with these loans requires interest rates without limits. That's outrageous. Because the high profits of these predatory lenders are threatened, we can expect them to pour money into lobbying efforts. Remember the legislation passed did not create a solution, it only authorized drafting of regulations. The regulations will have to be approved.

Consumer education is also part of the answer. I would urge anyone with bill payment problems to contact their local credit union or local bank for financial advice on loan consolidation or other budgeting advice. You can also talk to an accountant or there are many credit-counseling services that can help. A payday loan, or even using your credit card to pay off everyday expenses, can create a mountain of debt you can't pay off. Payday loans are a quick fix. If you pay it off it's not a problem. The problem is many people get caught in a vicious cycle when they can't pay off the first loan and it is rolled over and over creating interest-rate debt that far exceeds the original loan amount.

Credit unions, banks and credit card loans are regulated. Loan disclosures have to be written in a certain way and they have to be obvious and understandable. Payday loan stores are not putting out disclosures that are understandable. It is time that the same type of reasonable consumer protection regulation be placed on payday loans. Remember though, regulation and clearly written disclosure statements do not relieve you from your responsibilities. Always read the fine print on any loan contract you sign. If there is something you do not understand it is your responsibility to ask your credit union or bank loan officer for clarification.

One final word of advice: establish an automatic savings plan with your local credit union or bank and have a fund for rainy day problems. A good rule of thumb is to have about two months of expenses in a savings account that you can access quickly. Also, remember credit unions are cooperatives owned by their members. Support your local credit union so it can support you with financial services you can trust.

Tootie Holmes, manager of the Illinois Electric Cooperative's Federal Credit Union also serves as league director and legislative representative for the Sangamon Valley Chapter of Credit Unions. Although Tootie is one of the few people we know who actually got on the "Who Wants To Be a Millionaire" show, her advice is don't count on luck to make you a millionaire. "I work with a professional financial planner and even in his eyes I save too much," says Holmes.

The opinions and views of guest commentators are their own and may not represent those of the Association of Illinois Electric Cooperatives or the electric co-ops of Illinois.

4 ILLINOIS COUNTRY LIVING | NOVEMBER 2000