Payday Loans, Part One

Ask five random people what "usury" is and you'll likely get five blank stares. If you were to ask five people who worked in banking, you might find one or two people able to define the term.

Simple answer: usury is charging interest (on a loan) at a rate so excessive the borrower has difficulty paying off the loan. Usury is probably almost as old as economic exchange, but as an Old Testament concept, there was a moral component attached to it; you weren't supposed to charge interest on a loan to your brother (relative) but you could charge interest to a foreigner (stranger).

What's "excessive"? In the Old Testament (Nehemiah 5:10-11), 1% — or 12% per year — is acceptable. (Rates above 1% were considered usury.) Recognizing the truth of Proverbs 22:7b ("the borrower becomes the lender's slave"), once upon a time many state constitutions mandated "usury limits" as a reasonable protection for their citizens.

Given this background, consider a particular television commercial that penetrated my consciousness this morning. Toward the end of the spot I had mostly ignored, a tranquil, but authoritative voice issued this admonition: "Always use payday loans responsibly."

Responsibly? As in, whenever you require extra cash and just happen to feel like 250% interest isn't going to be a problem? As in, you don't have money to buy diapers for the baby so you get a payday loan where the service fees alone would cover the cost for two or more packages of diapers? With interest rates on payday loans ranging (according to one source) "between 390% and 780%," is it possible to use the word responsibly without wondering whether a lightning bolt might reasonably strike you dead?

Do a Google search for "payday loans" and almost 52 million (!) results come up. I didn't check every result but I suspect the majority are gateway sites to these "lenders" who are more than anxious to "serve" you.

Do a Google search for "loan shark" and you'll get a paltry half million (506,000) results, many of which are articles about loan sharks as opposed to vendors (lenders?). (I guess loan sharks are less likely to hang out their shingles, depending instead on their version of a 300-pound, brass-knuckled Vinnie for "customer relations.")

But here's an irony: in its article on loan sharks, Wikipedia mentions payday loans, characterizing them as a "type of consumer finance." Ha! — Similar to Vinnie's brass knuckles being one "type" of non-conforming collection instrument, huh?

In its 2006 report Financial Quicksand, the Center for Responsible Lending determined: "Ninety percent (90%) of payday lending revenues are based on fees stripped from trapped borrowers ... The typical payday borrower pays back $793 for a $325 loan."

One final question: can anyone define "predatory"?