Payday loans in Kansas can carry 391% interest and critics say it’s time for a change | KCUR 89.3

Maria Galvan earned around $25,000 a year. She was not eligible for social assistance, but she still struggled to meet her basic needs.

“I would work just to be poor and broke,” she said. “It would be so frustrating.”

When things went wrong, the single mom and Topeka resident took out a payday loan. This meant borrowing a small amount of money at a high interest rate, to be repaid as soon as she received her next check.

A few years later, Galvan finds himself short of money again. She was in debt, and garnishments were eating up a large chunk of her paychecks. She remembered how easy it was to get that earlier loan: walk into the store, be greeted with a friendly smile, get cash without judging what she could use it for.

So she went back to payday loans. Again and again. It started to feel like a cycle she would never escape.

“All you’re doing is paying interest,” Galvan said. “It’s a really sick feeling to have, especially when you’re already low on cash to begin with.”

Like thousands of other Kansans, Galvan relied on payday loans to meet his basic needs, pay off debts and cover unexpected expenses. In 2018, there were 685,000 such loans, worth $267 million, according to the Office of the State Bank Commissioner.

But while the payday loan industry says it offers much-needed credit to people who struggle to get it elsewhere, others disagree.

A group of Kansas nonprofits says the loans prey on people who can least afford triple-digit interest rates. These people come from low-income families, have run out of credit cards, or don’t qualify for traditional bank loans. And these groups say that not only could Kansas do more to regulate loans, but it lags behind other states that have taken action.

Alternatives to payday loans

Last year, Galvan finally finished repaying its loans. She got help from the Kansas Loan Pool Project, a program run by Catholic Charities of Northeast Kansas.

Once Galvan applied and was accepted into the program, a local bank agreed to repay approximately $1,300 she owed payday lenders. In exchange, she took out a loan from the bank for the same amount. The interest was only 7%.

Now that she’s out, Galvan says, she’s never coming back.

She doesn’t have to. The payments on this bank loan helped her build her credit rating until, for the first time, she could borrow money to buy a car.

“It was a very big achievement,” she said, “to know that I have this need and can meet this need on my own.”

So far, the project has paid off $245,000 in predatory loan debt for more than 200 families.

Claudette Humphrey directs the original version of the project for Catholic Charities of Northern Kansas in Salina. She says her program was able to help about 200 people by paying off more than $212,000 in debt. But it was not able to help everyone.

“The number one reason, always, why we have to turn people away,” she said, “is just because we have a limit.”

People are only eligible for the Kansas Loan Pool Project if they have less than $2,500 in payday debt and the means to pay off a new, low-interest loan from the bank. The program doesn’t want to put people further down the hole if they’re also saddled with debt from other sources, Humphrey said.

“Sometimes even if we paid that, they would still be upside down in so many other areas,” she said. “I wouldn’t want to put an extra burden on anyone.”

Humphrey doesn’t think his program is the only solution. In his view, it should be up to lawmakers to protect payday loan customers the same way they protect all consumers, by regulating payday loans like traditional bank loans.

“Why aren’t these companies held to the same standard?” she said. “Why, then, are payday and title lenders allowed to punish them at such an astronomical rate of interest for not being a good risk?”

Potential changes

Catholic Charities is just one of the nonprofits calling for stricter rules. Members of the coalition include churches and community organizations, said Shanae’ Holman, an organizer with Topeka JUMP, the group leading the campaign.

“There are other states that have guidelines in place that sell you how much income…what percentage of your check can go to a payment,” Holman said. “These are the kinds of regulations we would like to see,”

She wants Kansas to require longer loan terms so borrowers aren’t penalized for not being able to meet short payment terms.

Currently, the maximum term for a payday loan in the state is 30 days. By comparison, borrowers of small loans in Colorado must have at least six months to repay them, with no maximum loan period. In Ohio, borrowers have between 91 and 365 days to repay a loan. If the term of the loan is less than 91 days, the repayment must be less than 7% of the borrower’s net income.

Both states set annual interest rates close to 30%. Some states regulate payday loans the same as other consumer loans. But Kansas is like most other states, allowing annual interest rates of 391%. This means that a loan of $500 over two weeks at 15% interest can cost a client nearly $2,000 over the course of a year.

The group plans to work with lawmakers during next year’s session in Topeka.

This is the first time such a large group has organized around the cause, said Jeanette Pryor, a lobbyist with the Kansas Catholic Conference. Payday loan reform is a recurring topic at the Statehouse, she said, but convincing lawmakers to increase regulation is difficult.

“It’s something I heard early on. ‘Why can’t an adult make a rational decision on their own? Why do we have to legislate this?’” she said. “More the bigger the coalition, the more opportunities there are to educate lawmakers.”

Nick Bourke is director of consumer credit at Pew Charitable Trusts. He is pushing for reform of payday loan laws. He said reform is long overdue in Kansas, which hasn’t updated its payday loan laws since 2005.

“It is possible to extend small credit, even to people with damaged credit histories, for much less money than Kansans are currently paying,” he said. “But Kansas laws are outdated.”

In 2014, Pew Charitable Trusts conducted research on the use of payday loans in each state. The organization found that 8% of Kansas residents had used payday loans in recent years, which is higher than the national average of 5.5%. A typical borrower’s income was $30,000.

Office of State Bank Commissioner David Herndon, which regulates loans and penalizes lenders for breaking the rules, declined to be interviewed in person or by phone, but answered questions by email. Bank assistant commissioner Tim Kemp said the agency only enforces existing law and does not weigh in on proposed changes.

Attorney General Derek Schmidt’s office, which receives consumer complaints about payday loans, declined several requests for interviews and information.

A credit option

Payday lenders say they provide affordable credit to the large proportion of Americans who don’t have enough money to cover an emergency expense. The Community Financial Services Association of America, an industry group for small lenders, declined an interview due to scheduling conflicts, but sent a statement via email.

“Small dollar loans are often the cheapest option for consumers,” ACSA President D. Lynn DeVault said in the statement. “Particularly when compared to bank charges – including overdraft protection and bad checks – or unregulated offshore internet loans and penalties for late bill payments.”

Some Kansas customers, like Keri Strahler of Topeka, say the loans are helpful.

Strahler does not work, and most of her income comes from Social Security disability insurance. This year, she took out three payday loans to cover her medical debts and said she had no trouble paying them off.

She knows that many people view loans as predatory. But for Strahler, the loan alleviated more stress than it caused. Her credit cards had already run out and the loans helped her avoid being sued or having to sell her furniture to cover her debt.

“I chose payday loans because I wanted them processed immediately,” she said. “It was very helpful.”

Humphrey of Catholic Charities agrees that the loans can be helpful for some clients. The question is whether the state can prevent others from being exploited.

“I’m not saying there’s no place for them,” Humphrey said. “(But) is there a better way to do what they’re doing so it doesn’t devastate families?”

Nomin Ujiyediin reports on criminal justice and social welfare for the Kansas News Service. Follow her on Twitter @NominUJ or email nomin(at)kcur(dot)org.

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