The Health Impact of Payday Lending

A campaign to cap interest rates charged by payday lenders in Missouri is about more than the financial well-being of the vulnerable populations, supporters of the proposed ballot initiative said.
They said the initiative also could benefit the physical health of borrowers.

Critics of payday lenders said they trap desperate people in a web of spiraling debt and that medical costs often are a driving factor for those seeking the short-term, high-interest loans.

Crystal Williams, a Jackson County legislator, said she has heard such stories on the campaign trail. She also has encountered those situations during her career at non-profit organizations, which included time as an executive at Swope Health Services and at Partnership for Children.

She cited the example of an uninsured worker who racks up thousands of dollars in hospital bills after getting hurt on the job.

“Even if you work out a payment system with the hospital, which a lot of hospitals are willing to do,” Williams said. “Suddenly having a $200 payment a month to a hospital is the difference between your kids eating healthy food or not.”

If the family gets in trouble with payday debt trying to cover that health care cost, the experience could dissuade them from seeking medical care in the future, said Melinda Lewis, a Prairie Village-based public policy consultant. (The Health Forward Foundation is one of her clients. The foundation has provided financial support for efforts to establish payday-lending alternatives in the community.)

Advocates of capping payday-lending rates in Missouri said the stress of the debt also could induce health problems such as anxiety, depression or ulcers.

“I don’t think it matters whether health care bills were the prompt for the turn to payday lenders in the first place or whether it was something entirely unrelated to health,” Lewis said. “We still know that having a great degree of economic insecurity in your household is bad for your health.”

The average annual interest rate charged by payday lenders in Missouri is 445 percent, according to Missourians for Responsible Lending.

The organization spearheaded the signature drive to place on the November ballot a question that would limit the annual interest rate on small-dollar loans to 36 percent. The limit also would apply to car title loans and consumer installment loans.

County officials around the state are now verifying the petition signatures. It likely will take until August for the Secretary of State to certify the question for the ballot, according to Ryan Hobart, a spokesman for the Secretary of State’s Office.

Missourians for Equal Credit Opportunity are opposing the interest cap. Eric Banks, the group’s spokesman, said in an e-mail that unexpected health care costs are a prime example of the utility of payday loans.

“Medical emergencies are exactly the type of financial crisis working families not on Medicaid face,” he wrote. “Unfortunately, banks don’t provide the kind of convenient, low-dollar, short-term credit that people need. Payday loans provide many people their only source of short-term loans.”

According to the group’s website, the interest rate on payday loans is a good value compared with other financial charges. For instance, the average bank overdraft fee of $27 works out to about a 704 percent annual interest rate.

The site also claims that the “cycle of debt” charge made by critics is unfounded, since 90 percent of borrowers pay off their loan on time.

The effort to cap payday loan interest rates is not the only local movement to provide better deals for small-dollar borrowers.

Working under the auspices of the United Way of Greater Kansas City, a local coalition of nonprofits, congregations and individuals has established Fair Community Credit in conjunction with Central Bank of Kansas City.

Fair Community Credit has raised about $200,000, according to program coordinator Marisa Martinez. It uses those funds to back loans Central Bank makes to qualified borrowers at a 36 percent interest rate.

Since its launch in January, Fair Community Credit has backed 28 loans with no defaults, Martinez said. Most of the loans have been for about $1,000 and borrowers have either 18 months or 24 months to repay.

In at least one case, Martinez said, Fair Community Credit helped a family where the husband had turned to payday loans because of his wife’s illness.

“He was trying to get a grasp on all the things that were coming due,” Martinez said.

Health Forward Foundation
2300 Main Street, Suite 304
Kansas City MO 64108
(816) 241-7006