Many Nebraskans are financially secure, and if they need credit for a major expense, they can go to a bank or credit union for a loan. Many other Nebraskans don’t have that option. They have modest incomes and sometimes turn to a payday lender for a cash advance. Last year, about 50,000 Nebraskans did so, with an average loan of $362. The average person took out 10 loans over the course of the year.
In some cases, individuals found themselves in a terrible debt spiral. World-Herald news coverage recently cited the example of a Gretna man who borrowed $500, paying an initial $75 fee for a two-week loan. But he ran into a string of financial complications, and by the time he finally met his obligation to the lender, he had paid more than $5,800 in fees.
Concern over such disturbing instances of heavy indebtedness has spurred 16 states, plus the District of Columbia, to cap the annual interest at 36% or less on payday lending or prohibit payday lending entirely. Congress in 2006 set a 36% cap on such borrowing by military personnel.
Initiative 428, on the November ballot in Nebraska, would set a 36% cap, and the measure deserves passage. It’s understandable that our society seeks to protect vulnerable individuals from financial catastrophe. Voters in South Dakota, Colorado and Montana have passed ballot measures to require a 36% cap.
For the long term, Nebraska’s best solution is to promote economic strategies that boost the state’s number of good-paying jobs providing financial security. In the present day, it’s important to understand that the demand for cash advances by a considerable number of low-income Nebraskans is a market reality. Lenders of some kind will meet that need, and the public interest is best served if such lenders are institutions within the regulatory reach of Nebraska state government. In some cases, the troubling alternative has been online lenders posing a high predatory risk. This has been a particular concern for residents of some Native American reservations.
Nebraska imposes a range of regulations on payday lenders. The state requires that the lender verify the borrower’s income and provide financial literacy information. The borrower must have a job and a bank account and reach a particular income level. The state sets a limit of $500 on a single payday loan. State regulators carry out financial examinations of these lending businesses.
For many borrowers, these arrangements meet their needs. A study by the Pew Charitable Trusts found that 69% of payday loans are taken out to meet recurring expenses. At the same time, as many states have concluded, it’s appropriate to provide a backstop through an interest cap.
The Pew study concluded that “in states with lower rate limits, payday credit is not significantly constrained; instead, fewer stores simply serve more customers each. For example, in the three years after Colorado lowered permissible interest rates for payday loans, half of stores closed, but each remaining store served 80% more customers. Borrowers’ access to credit in the state was virtually unchanged.”
Those findings offer reassurance as Nebraskans ponder this issue. The demand for these loans is a reality, and it’s important that our state approaches this issue with a proper combination of moral awareness and economic realism. A proper tool for that goal is on the November ballot. Nebraskans would do well by voting FOR Initiative 428.