391 Percent Interest on Fast Money: Worth It?

 

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A shift in politics, Peterson said, also proved key to the evolution of legal payday lending: Conservative evangelicals who had once opposed the practice, he said, changed their minds after aligning themselves politically with "big business" conservatives.

"Some of the strongest proponents of usury regulation had their voices silenced," he said.

Since then, he said, more than 30 states have legalized payday lending.

Meanwhile, the number of payday lending locations has grown substantially: Schlein, of the Community Financial Services Association, said there are roughly 24,000 payday lending storefronts today, up from 10,000 eight years ago.

But the tide may be turning.

In passing its interest rate cap law, Ohio is the latest of five states -- the others are North Carolina, Georgia, New Hampshire and Oregon -- to restore payday lending restrictions. The District of Columbia has also passed a payday lending rate cap -- 24 percent -- and the federal government made it illegal last year for creditors to grant payday loans to members of the military.

Public officials and private lawyers have also headed to court to fight payday lending.

In Arkansas, lawyer Todd Turner said he has represented at least 30 class-action cases against lenders. Turner said that payday lenders operating in Arkansas are trying to skirt interest rate limits set in the state's constitution.

"I'm going to keep filing lawsuits and I hope that civil law will ultimately close a lot of these places," he said.

In West Virginia, where payday lending was never legalized, the state attorney general's office sued or settled with dozens of Internet-based payday lenders making loans to state residents. The state is also investigating collections agencies employed by payday lenders.

"Eventually, when there's no one there to collect them, it'll be another roundabout way of making them stop," assistant attorney general Normal Google said.

Schlein said that the payday lending industry has been undeterred by the challenges it has faced so far. The legal status of payday loans, he said, has been debated in different states for the past 10 years.

"We win some, we lose some," he said, "and things come out in the middle."

A tentative win for the industry may come from California, where a bill in the state assembly this spring proposing a 36 percent interest rate cap on payday loans has failed to make headway.

California assemblywoman Lois Wolk was among the critics of the bill. She echoed the argument set forth by payday lending proponents that, for some borrowers, payday loans are the only option.

Wolk said that visiting payday lending stores and meeting their customers helped inform her opinion.

"The people that I talked to were nurses, service people. ... They all said this was a great convenience to them and they knew it was costly," she said. "They had no choice because there weren't alternatives available to them.

"I think until there are clear alternatives that are available and achievable," Wolk said. "I was very unwilling to make draconian change in the market."

Looking Beyond Payday Loans

Payday lending opponents argue that there are viable alternatives to payday loans, such as working out payment plans with bill collectors, planning ahead by setting aside emergency funds or using credit cards.