In tough economic times, at least one industry is making a heyday out of the financial desperation of others.
Strapped for cash, countless Texas families find themselves turning to payday and auto title lenders for quick short-term fixes, soon falling into a spiraling cycle of debt that only worsens their plight.
A lower income class problem, you might say? Think again.
These loan businesses are booming, buoyed by the fact that middle class households are increasingly living paycheck-to-paycheck. A slip here or there and they too find themselves knocking on lenders’ doors.
Payday lenders are also targeting our troops. A federal law caps the interest rate on loans to military families at 36%. Sadly, Texas doesn’t have the mechanism to enforce the cap, leaving our soldiers vulnerable to the same never ending cycle of debt as the rest of us.
But there is hope.
As the Texas legislative session gets underway, momentum is building to put an end to these usurious loans, where annual percentage rates (APR) of 500% or more are quite common. From Midland to El Paso and from Brownsville to Richardson, cities and towns are adopting resolutions urging the governor and the Texas Legislature to act, to close a loophole in the law that has led to so much financial hardship for so many.
Payday loans are basically cash advances, due by the borrower’s next payday. Auto title loans are similar but secured with car titles.
Lenders market these loans as a quick fix with "no credit restrictions" and no background check. Once Texans take out loans, their real nightmare begins. Many are unable to pay the full amount due (principal, plus an exorbitantly high fee) on time. They must choose between defaulting and starting the whole process again with the full amount (principal, plus a new exorbitantly high fee) due in another 14 days. This cycle continues until Texans wind up paying many times over the original amount. An average payday loan borrower pays $840 for a $300 loan.
How do they get away with it, you might ask? Basically, they work through a loophole in state law that allows them to charge whatever they please. By operating as "credit service organizations," they escape the regulatory oversight that applies to other lenders, allowing them to charge these extreme rates.
But the tide is turning in a truly bipartisan way. Governor Perry supports reform. In the 2010 AARP’s voter’s guide, he supported licensing and regulating these lenders. State Representative Tom Craddick (R-Midland) and State Senator Wendy Davis (D-Fort Worth) have introduced legislation to close the loophole that allows small dollar lenders to operate unchecked.
AARP is working with civic, community and faith groups across the state to end abusive payday and auto title lending, which is a problem for many of our members. Twenty percent of payday loan borrowers in Texas are age 50+.
We urge the Texas Legislature to take a strong stance. Close loophole and promote fair and responsible lending in Texas.