Ohio’s payday loan ban has pushed people to run to pawn shops – Quartz
Until 2008, a cash-strapped Ohio customer looking for a quick two-week loan from a payday lender could end up paying hefty fees. These unsecured short-term loans – often secured by a post-dated check and rarely exceeding $ 500 at a time – carried annual percentage rates (APRs) of up to nearly 400%, more than ten times the normal limit allowed by usury laws.
Then, 11 years ago, the government stepped in to make these loans prohibitively expensive. Ohio’s short-term loan law limits the APR to 28%, reducing the margins of predatory lenders and effectively banning payday loans in the state. But while the law was meant to protect the poor, it seems rather to have sent them scurrying towards other, equally precarious alternatives.
A new economic article by Stefanie R. Ramirez of the University of Idaho, published in the journal Empirical Economics, examines the effect of legislation. Although he was successful in terminating the loans, Ramirez argues, it had the unintended effect of shifting the problem to other industries favored by people with few alternatives and bad credit. Potential borrowers now rely on pawn shops, overdraft fees, and direct deposit advances to quickly find themselves in the dark when times get tough.
Ramirez used the Ohio state licensing records to measure changes in the number of pawn shops, precious metals dealers, small loan lenders, and second mortgage lenders operating in the state. . Once the laws were introduced, she wrote, the number of pawn shops in Ohio rose 97%, while small loan and second mortgage lenders rose 153% and 43% respectively.
Pawn shops may seem Dickensian – hanging on a beloved family heirloom to avoid being sent home from work – but they are an integral part of America’s financial landscape. There are around 12,000 of them across the country, each operating a similar pattern: Customers in need of hard cash bring back something worth selling, which they will hand over for an amount of between 40%. and 60% of the item’s value. Over the next few weeks or months, they slowly pay off their loan, along with storage fees and interest of up to 400% per year. (In Ohio, interest is capped at 6% per month, or 72% per year.)
If the borrower cannot repay their loan, the item is kept by the pawnshop and sold to a paying customer. With payday loans under threat across the country, Robbie Whitten, managing director of Money Mizer Pawn and Jewelry in Georgia, told the New York Times: “We’ve kind of become, I like to call it the poor man’s bank.
This isn’t a role model most would choose – who would risk losing something they love? You don’t even need a bank account.
People with bad credit are often drawn to payday loans after being excluded from safer alternatives. A study cited by Ramirez found that 73% of payday loan users had rejected or limited credit extension requests in the previous five years. And their desirability matters, too: Loans are often used for vital payments on utility or telephone bills.
As a way to eliminate payday loans, Ohio’s STLL law worked. But from a consumer protection point of view, it was a little less successful. “Policymakers may have simply moved operating companies from one sector to another, having no real effect on the conduct of the market,” writes Ramirez.
Without eliminating the reasons why people might seek payday loans and give them access to safer borrowing options from which they are currently excluded, it is difficult to see a good alternative solution for potential borrowers. For the desperate, the risks and debts associated with pledging a cherished engagement ring can be even less appealing than watching the growing debt barrel of payday loans.