Opponents of short-term lending such as payday and title loans said IM21 put an end to usury lending and has led people who need small amounts of cash quickly to seek more scrutable sources with lower interest rates.
“Our basic plan was, ‘Think where you’re going to go when your payday loan is overwhelming, and go there first,’” said Cathy Brechtelsbauer, a Sioux Falls advocate for the poor who is the state coordinator for the group Bread for the World.
“We work on hunger issues, and this was a hunger issue,” said Brechtelsbauer, who worked on a committee that pushed passage of IM21. “If you got trapped by the payday loans, then you can’t meet your basic needs.”
But to lenders, especially those at locally run stores where lenders had personal relationships with their clients, the death of the payday loan industry has actually penalized the poor, eliminating one easy way for people who live paycheck-to-paycheck to obtain cash to pay an emergency bill, buy food or pay utility bills between paydays, or avoid exorbitant overdraft charges.
Borrowers who had a job and could provide pay stubs, could obtain a loan for up to $500 usually for a one-month term or less.
Under a typical payday loan, the borrower would owe 10 to 25 percent interest on a monthly basis on loans from $100 to $500. On the smallest but most common of loan of $100, a borrower would owe $110 to pay off the loan after a week, an annual APR of 520 percent. On a monthly term, the borrower would pay $125 to satisfy a $100 loan, an annual rate of 300 percent. On a $500 loan payday cash advance Reading OH over a month, the borrower would pay a 25 percent monthly rate, or $625 to satisfy the loan after a month, a 300 percent annual rate.
For those who paid the loans back on time, typically within one month, the money could serve as a bridge between one payday to the next. But two payday loan scenarios could put borrowers in trouble.
“Based on your income, you might be able to afford a $1,200 monthly mortgage, but you don’t go out and buy five houses and have five mortgage payments of $1,200.”
State law allowed lenders to rewrite the loan up to four times after the initial loan, and borrowers were required to pay off 10 percent of the principal at each renewal
“The only way you’d be ruined is if you went around to store after store after store, and when they all came due, you’re done,” said Rob Tschetter, owner of Pawn with Us in Rapid City who made payday loans for 15 years before IM21 took effect. “Based on your income, you might be able to afford a $1,200 monthly mortgage, but you don’t go out and buy five houses and have five mortgage payments of $1,200.”
Difficulty could also arise if the borrower couldn’t pay back the whole amount after the monthly loan came due. In the case of a $100 loan, the $25 fee was still owed along with a $10 payment toward principal, so with four renewals possible, the payments and interest rates quickly skyrocketed.
Their hope is that without payday and title loans to draw upon, borrowers have turned to credit unions and banks, family members or employers
After the four monthly renewals allowed by law, and a requirement to pay down 10 percent of the principal at each renewal, that borrower of $100 would have paid $183 to satisfy that loan after five months, while the borrower of $500 would have paid a total of $995 over the five months to satisfy a $500 cash loan.