The already astronomical interest rates for payday loans in Utah are rising, to an average of 528 percent, with the highest rate topping a stunning 1,500 percent. Still, 1 of every 5 payday loan stores in the state closed in the past two years.
That’s according to new annual data compiled by the state about the industry — portrayed by critics as a “debt trap” that can easily hook and financially drain the poor, but defended by lenders as a needed service for people with poor credit and few other loan options.
The annual report by the Utah Department of Financial Institutions also has encouraging news about payday loan customers: They are borrowing less, and 1 in 8 now take advantage of state-mandated programs that allow them to enter into interest-free, extended-payment programs to avoid default.
“If more consumers are using that offramp, that’s good,” says Rep. Brad Daw, R-Orem, who has long pushed reforms for the industry. But the report shows the industry is suing customers for default twice as often, and that "is a red flag. It suggests they are still lending to people who really can’t afford those loans and that it may be a debt trap.”
Most payday loans are for two weeks, or until a borrower’s next payday. Utah law allows renewing them for up to 10 weeks, after which no more interest can be charged. Critics say customers often take out new loans to pay off old ones — even though the Legislature outlawed that last year — leading to swelling debt.
New data show that the average payday loan in Utah now charges 527.69 annual percentage rate (APR) interest, up from 484.76 percent last year. In comparison, academics say the New York Mafia charged 250 percent in the 1960s.
The cost to borrow $100 for seven days at that new higher average rate is $10.12, up from $9.30 a year earlier — or 82 cents a week more per $100 borrowed.
Some lenders charged as much as 1,564.29 percent APR during the year, or $30 a week per $100 loaned, the state reports.
“If you have to pay 1,500 percent interest, that’s worse than whatever short-term cash problem you are trying to solve,” says Bill Tibbitts, director of the Utah Coalition of Religious Communities, an advocacy group for the poor and a critic of payday loans. “The high interest they charge shows it is a debt trap.”
Wendy Gibson, spokeswoman for the Utah Consumer Lending Association for the payday loan industry, says the state requirement to show loan costs by using APR is misleading.
“It calculates interest for an entire year. In Utah, payday lenders can only charge interest for 10 weeks and the average length of a loan is 31 days,” she says. “Payday loans give borrowers far better, less-expensive options than [check] overdrafts, returned-check charges and utility disconnect/reconnect fees.”
For example, she says, “If you bounce a $100 check with an overdraft fee of $39, the APR would calculate to 2,033.57 percent, if you paid your financial institution back in one week.”
Gibson adds that the highest 1,500-plus percent interest charged likely was from lenders that charge a flat fee regardless of loan duration, so paying them off early creates a higher effective rate. “For this reason, the Utah Consumer Lending Association encourages consumers to shop around for the most competitive rates.”
Gibson says that average rates likely rose this year because “inflation impacts every type of business, including our industry. Occasionally, small price increases are necessary to keep up with rising expenses, such as rent, labor, utilities and other costs.”
Critics, such as Tibbitts, also say that some newer state mandates including offering interest-free extended payment plans and a clear ban on giving consumers new loans to cover old ones may be raising costs for the industry — and may be why so many have closed in the past two years.
State data show that payday lenders doubled the number of lawsuits they filed for default this year — filing cases for 6.94 percent of the loans they issued (1 of every 14) compared with 3.35 percent last year.
“The lenders make more money if people do not pay on time,” Tibbitts says. Not only can they charge interest longer, “they can charge collection fees and attorney fees if they get judgments. The number of lawsuits creeping up is a real reason for concern.”
But, Gibson says, “When a loan defaults, the lender would rather offer an interest-free payment plan than be forced to collect through civil action.”
She also notes that since July 2016, Utah payday “lenders are required to offer an interest-free extended payment plan in writing to all consumers who default, in a final attempt to help the consumer repay their loan before civil action is taken.”
More people are taking advantage of that option: 12.69 percent of all loans (1 of every 8), compared with 8.47 percent last year.
Martha Wunderli is executive director of the nonprofit AAA Fair Credit Foundation, which helps people mired in debt work out repayment plans with their creditors. She says many clients with payday loans are not sophisticated enough to realize the option exists for the interest-free payment extensions and do not know how to trigger them.
Ellen Billie, programs director with that foundation, says some lenders seem to try to trap borrowers into default.
For example, she says her foundation sent money to pay off one loan 10 days before a deadline to avoid default. She says the lender claimed it was received four days late, after a lawsuit was filed. “I don’t believe it took two weeks to get to Ogden in the mail,” Billie says.
Nearly 1 of every 5 bricks-and-mortar payday loan stores in Utah have closed during the past two years, down from 553 to 444, according to state data. Most of those closed in fiscal 2017 — but 18 also closed in 2018.
“This decrease is caused by a highly competitive environment in this market,” Gibson, with the payday lender association, says.
“As for pricing” — including interest rates that have been rising among remaining stores — “it is driven by the same factors that impact most businesses, such as expenses, volume and competition,” she says.
Also, state data show customers are borrowing less, which could cut into profits. The average loan this year was for $378, down from $406 last year.
Some extra state regulation in recent years also may have increased costs — such as the requirement to allow interest-free extended payments on loans, and a new, clearer ban on giving new loans to cover old ones (a practice critics say the industry pushed to keep customers paying high rates to avoid harming credit ratings and collection fees).
“Payday lenders are the only lenders," Gibson says, "who provide consumers an interest-free period to repay their loans without fee or penalty even after default” if the borrower formally requests it.
Billie, with the AAA Fair Credit Foundation, says based on the clients she helps, she believes payday loans are as prevalent as ever “and even maybe more so.” She says more loans seem to come from online lenders — which may be another reason that bricks-and-mortar stores are closing.
The state does not track the number or Utah volume of business of online payday lenders.
Despite the recent law to ban providing new loans to cover old ones, Billie also says she still sees many clients “with multiple payday loans, usually with a mix from stores and online companies.”
Daw, the legislator who has pushed for reform of the industry, doubts any further regulation of the industry is likely in the near term. Tibbitts says critics would love to see the state reinstate a cap on interest rates that it had until the early 1980s, but doubts that is possible politically for now.
The industry has been a significant donor in Utah political races. This year, it donated to candidates in at least 56 of the state’s 90 legislative races — giving at least $26,000 overall in the races that are usually low cost.
The industry once managed to defeat Daw. House investigators who looked into scandals that toppled former Utah Attorney General John Swallow — who received large donations from the industry — said it funneled big money through Swallow to shady groups that helped defeat Daw in 2012. The lawmaker won election again two years later.