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Google announced this week that they would no longer accept advertising from payday lenders, an important step forward in the effort to fight one of the worst types of financial abuse against consumers. This is a battle many consumer groups, including AARP, have been fighting successfully in Pennsylvania for years, but it's also something consumer groups must constantly remain vigilant about, because payday lenders are persistent in their efforts to expand their markets.
Why are we concerned about payday lending? Some background on the issue will help to explain why this practice is such a danger to consumers. Many consumers with bad credit histories have a difficult time getting loans from lenders like banks or credit unions. Unscrupulous payday lenders prey on individuals when they are most vulnerable, getting them hooked on a series of cash advances at extremely high interest rates.
Here is an example of how a payday loan typically works: A consumer might need $3000 for a car repair and doesn't have the money. Unable to get the money anywhere else, the consumer goes to a payday lender, who offers to lend the consumer $3000 - for a "fee" of $250 due in 30 days (typically the next "payday" for a consumer) when the loan must be repaid. Unfortunately, for many consumers, they are unable to pay off the loan and need to take out another one - with yet another "fee." In reality, these "fees" are interest payments on the loan and it's an effective interest rate of over 300%.
Fortunately for residents of the Commonwealth, Pennsylvania has one of the strongest laws in the nation to prevent payday lending. Lenders are not permitted to charge more than a 36% annual interest rate on loans, including short-term loans. This law is why small shopping centers in Pennsylvania aren't filled with the storefront payday lending shops you see in many other states. The payday lending companies aren't pleased with this situation of course. Over the past few years, these companies have flooded the Capitol in Harrisburg with lobbyists attempting to get this law changed to allow payday lending. Fortunately, consumer groups have fought back. A coalition led by AARP, the Center for Legal Services, and retired military groups have successfully stopped the efforts to change the law.
The good news is that the campaign against payday lending is strengthening. Google's move to ban advertising by payday lenders is a promising sign; it eliminates one of the primary ways payday lenders attempt to avoid Pennsylvania's law - on-line advertising. Other states are working to toughen their laws; at the federal level, payday lenders are banned from locating their shops near military bases (payday lenders target military personnel).
Meanwhile, the problem of how to responsibly allow consumers to get short-term loans for sudden or unexpected needs is a concern. AARP will continue to work with the financial services industry and elected officials on a solution to this vexing situation.
“Ray’s Round Up” features updates on current state and federal issues by Ray Landis, AARP PA’s Advocacy Manager.