New loan service helps people reduce payday loan debt

Sherry Shannon, a resident of Minneapolis, borrowed $ 140 from a payday lender to fund a repair to her car almost two years ago. Even though she tried to pay it back, the loan swelled each month with interest and fees until it more than doubled from the original amount.

“It was just a nightmare,” Shannon said. “I didn’t think I would ever get out of it one day.”

Shannon eventually got help from her church to pay off the debt, but consumer advocates say millions of borrowers across the country have found themselves in a similar situation.

This prompted a nonprofit organization to launch a one-of-a-kind loan service that aims to help consumers stuck in a cycle of debt at payday lending establishments. Exodus loan started offering refinance payday loans this week.

Payday loan is a short term loan obtained from the borrower’s future salary. Opponents of the payday lending industry say it is preying on low-income people, charging borrowers high interest rates and fees. Industry officials claim they are providing a temporary service for those trying to reach for the next paycheck.

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“There is always a charge up front when you take out the loan, but also a charge each time you renew it” when taking out a new loan, said Adam Rao, director of Exodus Lending. “By the time they are able to repay the loans, if they can get by, they have paid exorbitant amounts and fees compared to the original loan amount.”

The Consumer Financial Protection Bureau estimates that 80% of payday loans are renewed at least once and nearly a quarter of borrowers renew them more than six times. To avoid this cycle of skyrocketing fees and interest, Exodus Lending offers interest-free refinancing for payday loan debt, as well as long-term financial advice.

Dozens of companies are offering payday loans in Minnesota from physical storefronts as well as online. The Minnesota Department of Commerce estimates that the average payday loan in the state last year was $ 303. By the time the loan was repaid with all fees and interest, the average borrower had paid 228% of the original loan amount. The average annual payday loan borrower in Minnesota takes out 10 loans per year.

Exodus Lending grew out of concern over a payday lender named ACE Cash Express who moved into a building near the Holy Trinity Lutheran Church in Minneapolis about three years ago. Opponents of payday lenders, including at least a dozen people wearing office necklaces, gathered outside the company on Maundy Thursday to announce the launch of Exodus Lending.

“We think financial institutions and banks should be able to take advantage of loans. We just think that kind of interest rate is absolutely ridiculous, it’s obvious usury,” said Pastor Paul Slack, president. of the faith group. ISAE. “In fact, we think it’s theft, and we think it’s a sin, and we think it’s high time that it was regulated and that this practice was actually stopped.”

The Consumer Finance Protection Bureau discovered last year that ACE, a national company based in Texas, had used illegal tactics against its clients. It forced the company to pay $ 5 million in fines and $ 5 million in refunds.

The director of ACE Cash Express referred all questions to the company’s head office. Company officials did not respond to requests for comment.

But others in the industry argue that payday loans are often the most affordable of a set of options that include credit cards or the possibility of overdrafting bank accounts.

“The vast majority of Americans use payday loans responsibly and make informed choices about their personal financial situation,” said Amy Cantu, spokesperson for Community Financial Services of America, which represents some major licensed payday lenders. “They are looking to short term credit to solve this temporary cash flow problem until their next payday.”

Cantu said his organization rejects the notion of a “debt cycle” caused by payday loans.

“What we’ve seen in these states with no payday loan option is that consumers are turning to riskier, more expensive products,” Cantu said. “They basically have to look to operators who operate in the shadows and supply this product illegally and outside the bounds of the law.”

There are bad players in the industry, Cantu said, but members of his organization stick to a set of best practices that include the right to terminate a loan, truthful advertising, and an extended payment plan that allows you to repay a loan over a period of additional weeks at no additional cost.

The payday lending industry has come under increasing scrutiny in recent years. The Consumer Financial Protection Bureau announced late last month that it was exploring ways to end what the agency calls “payday debt trapsThe agency could require payday lenders to assess a borrower’s ability to repay before granting a loan, require affordable repayment options, and limit the number of loans borrowers can take out each year.

At the state level, a bill that would have capped the number of payday loans taken out by borrowers was passed by both houses of the Legislature in 2014, with the vocal support of Governor Mark Dayton. But this failed because the conference version was not adopted at the end of the session.

A bill introduced this year would limit all fees and interest to 30% of the original payday loan amount. This legislation has not progressed this session, but could go ahead next year. A spokesperson for the Minnesota Department of Commerce said the agency and administration wanted to find ways to combat the “debt cycle” that occurs when borrowers run into financial trouble.

Other faith groups across the country have launched similar projects to refinance payday loan debt, but Exodus is the only one to combine this effort with financial advice, said Rao, the director.

The project is starting small, in the hope of initially refinancing the payday loan debt of some 20 borrowers. But Rao hopes that will gain momentum in a climate where payday lenders are increasingly under scrutiny.

“Even though this is on a small scale, it is a very significant and significant impact on the lives of people, who will then become advocates for this issue and help encourage others to also take control of their financial future, ”Rao said.

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