The United States hosts more than 23,000 payday lending stores, which outnumbers the combined total of McDonald’s, Burger King, Sears, J.C. Penney, and Target stores. These payday lenders do not make conventional loans as seen in most banks, but instead offer short-term loan amounts for short periods of time, usually until the borrower’s next paycheck, hence the name “payday loans.”
While some borrowers benefit from this otherwise unavailable source of short-term and small-amount credit, the payday lending business model fosters harmful serial borrowing and the allowable interest rates drain assets from financially pressured people. For example, in Minnesota the average payday loan size is approximately $380, and the total cost of borrowing this amount for two weeks computes to an appalling 273 percent annual percentage rate (APR). The Minnesota Commerce Department reveals that the typical payday loan borrower takes an average of 10 loans per year, and is in debt for 20 weeks or more at triple-digit APRs. As a result, for a $380 loan, that translates to $397.90 in charges, plus the amount of the principal, which is nearly $800 in total charges.
How do lenders in Minnesota set up this exploitative debt trap? Unfortunately, quite effectively. First, the industry does virtually no underwriting to measure a customer’s ability to pay back a loan, as they only require proof of income and do not inquire about debt or expenses. Second, the industry has no limit on the number of loans or the amount of time over which they can hold people in triple-digit APR debt. These practices are both grossly unethical and socially unacceptable, as payday lenders too often prey upon the poor for the sake of profit, which in turn leads to a cycle of debt among the poor, which includes longer-term financial harms such as bounced checks, delinquency on other bills, and even bankruptcy.
As affirmed by the Joint Religious Legislative Coalition (JRLC) of Minnesota, the practices of most contemporary payday lenders are similar to those condemned in the sacred texts and teachings of Judaism, Islam, and Christianity. As the Hebrew Bible declares, “If you lend money to my people, to the poor among you, you shall not deal with them as a creditor; you shall not exact interest from them.”
In addition, the Qur’an takes a principled stance against predatory lending, as charging interest is opposed by Allah, as it is the responsibility of financial professionals to liberate people from debt rather than deepen them further into it (Surah 2:275-281). In a similar fashion, the Sermon on the Mount of Jesus (Matthew 5) and other Christian teaching includes words of honorable lending for the sake of sustainable livelihoods.
While thousands of payday lenders in Minnesota — and throughout the United States — continue to exploit our most financially pressured citizens, we should vigorously oppose business practices that abuse people’s financial problems for the sake of profit. The JRLC and others are advocating for reforms to the payday lending industry, such as: 1) reasonable underwriting, and 2) a limit to the amount of time one can hold repeat borrowers in debt at triple-digit APR interest. Minnesota legislators are currently considering these important matters, and in doing so, they ought to implement fair lending regulations that tame this predatory product into what industry claims it to be — helpful access to emergency small-amount credit — without the life-destroying trap placed upon our most economically pressured citizens.
As people of faith we should value the fair treatment of those with the least financial means. As a result, we should oppose the exploitation of those experiencing financial hardship and affirm that the current regulatory structures in Minnesota — and far too many others states — are unacceptable. Though financially stressed citizens clearly need access to short-term and small-amount credit, allowing its provision through means that dig borrowers deeper into debt is wholeheartedly wrong. There are currently seventeen states that have effectively banned payday lending, and five others have enacted restrictions similar to those being considered in Minnesota. For the sake of life in its fullness for all U.S. citizens, especially those most vulnerable in our society, we need to take a stand of integrity against the predatory practices of payday lending in Minnesota and beyond. A failure to do so would continue to trap us all.
Brian E. Konkol is an ordained pastor of the Evangelical Lutheran Church in America (ELCA), and serves as Chaplain of the College at Gustavus Adolphus College in St. Peter, Minn.