Since my last entry, things have kind of slowed down a bit in the School-to-Prison Pipeline area of work at Texas Appleseed so I’ve been helping out on the Payday and Auto Title Loan project. Texas Appleseed is a member of the Texas Fair Lending Alliance along with 70 other organizations that are all working to develop and implement meaningful reform that will end the cycle of debt caused by these types of loans.
Before working on this project, I always drove by these types of businesses, but never knew how they operate. I even lived right across the street from one when I first moved the Austin and was still oblivious to their practices. Payday and Auto Title Loan places are popping up all over Texas and there are about 200 storefronts in the Austin area alone, and around 3,300 in the state.
Payday Loan: a small cash advance with a two-week loan term that carries interest and fees
Auto Title Loan: loan with a typical one-month term that uses car title as collateral and carries interest and fees. If the borrower defaults, the loan company can take the car
These loans are pretty easy to get and they’re quick so they seem appealing, but the majority of these loans carry huge usurious rates, approximately 500%-1,000% APR and also come with excessive fees. It creates a cycle of debt because borrowers are often only able to pay off the high fees month after month, making the minimum payment without ever paying down the principle. Sometimes borrowers even have to take out another loan to pay off the first loan.
The City of Austin implemented a city ordinance in an attempt to end the cycle of debt by requiring the following:
- Limit loan size – Payday loans limited limited to 20% of borrower’s gross monthly income and Auto Title loans limited to less than 3% of the borrower’s gross annual income or 70% of the vehicles value
- Limit the number of installments to 4 and rollovers to 3
- Proceeds from each installment or renewal must reduce loan principal by 25%
- Register with the city
The past few weeks, I’ve been visiting Payday and Auto Title Loan places throughout Austin to see if they are following the ordinance. I’ve been to about 25 stores myself, and it’s been really eye opening. I have been surprised with the number of customers that visit these stores. At one place, I even had to wait 40 minutes to speak to a worker because they were so crowded at the time!
A lot of the places that I’ve visited have found a way to get around the ordinance by sending borrowers to their other storefronts outside the city limits to make their payments, and they have been very open about it. One woman even told us: “They found a loophole.” Others have openly acknowledged the fact that they are required to follow the ordinance now and explain how it has changed their loan practices (i.e. “we can’t loan you as much as we used to be able to” and/or “you don’t have as long to pay the loan back”).
There have also been several places that openly encourage you to take out the max amount that you’re able to, even if you don’t need to borrow that much money. Some also explain that you can keep the loan out as long as you want, provided you make the minimum payment, which is just the interest and fees. I can definitely see how people are easily trapped in this cycle of debt after visiting a number of businesses.
Other places though, are following the ordinance , and we even stumbled upon a few that are very upfront and encourage people to pay the loans off as soon as they can, urge them to take only the amount they need, and explain honestly that the loan can become extremely hard to pay back over time. So there have been some bright spots in my visits.
I think that it’s an issue that everyone needs to be aware of. As a student, I could easily see myself unknowingly getting involved and taking out one of these loans and being hit with the reality of it later down the road. Overall, this is not something I expected to work on this summer, but it’s been extremely revealing. It is an issue that I will continue to follow and remain interested in after I leave Texas Appleseed this summer and I’m grateful that I’ve been exposed to it.