Payday lending customers seek loans thinking they are getting an advance on their paychecks when they’re really getting cemented in a debt trap . The trap works like this: a customer takes out a short term loan to cover living expenses, leaving a postdated check to cover the advance. The customer receives the cash right away minus the lender’s fee. For example, someone who borrows $500.00 might actually receive $400.00. The lender then holds the check for a week or until the borrower’s next payday, when theoretically the loan will be paid in full. As a practical matter, most borrowers can’t afford to pay the loan in full and still cover living expenses. Now the payday lender has its “customer” right where it wants them.

If the postdated check is not covered, the borrower accumulates bounced check fees from the bank and the lender, who can pass the check through the borrower’s account repeatedly. According to the center For Responsible Lending, payday lenders have used aggressive collection practices, sometimes threatening criminal charges for writing a bad check even when state law prohibits making such a threat. Under these pressures, most payday borrowers get caught in the debt trap. In order to avoid penalties, the borrower pays another $100.00 fee to keep the loan out of default. This cycle continues as the borrower can never afford to pay off the principal amount borrowed put continues to service the debt with a payment of $100.00 every two weeks. The result is a borrower paying $100.00 every two weeks to service a $500.00 loan, never paying down principal , with the threat of default and more fees constantly threatened.

Now Congress is considering a bill (HR 1214) that would effectively allow payday lenders to charge 391% annual interest. The proposed legislation is being touted as an important check on the industry! The Center For Responsible Lending strongly opposes the bill. The provisions of the House bill, HR 1214, do not address the “fundamental problems with payday lending that trap borrowers in debt,” says CRL President Michael Calhoun.Instead, CRL supports a bill that has been introduced in the senate by Senator Durbin (D-IL) that would cap annual interest rates on consumer credit at 36%. Frankly even a 36% APR seems high. The enforecement of usury laws has gone out of fashion in this country, but charging consumers excessive interest in the hopes of locking them into a perpetual debt trap should be stopped.