Curbing payday lending

A bill to curb payday lending passed in the state Senate last week could help break the cycle of debt in which thousands of South Carolinians are trapped.

After coming close to considering an outright ban on payday lending in the state, senators approved a bill last week that was tougher than a compromise reached earlier. The bill, which was passed by voice vote, limits borrowers to one loan at a time and requires a seven-day cooling- off period between loans.

The measure also caps the amount of a loan at 25 percent of the borrower's income or a maximum of $500. Under those terms, a borrower with an annual income of $25,000 to $30,000 could borrow about $250 to $300 during a two-week period.

To prevent borrowers from going from one payday lender to another, the bill requires the State Board of Financial Institutions to keep a database of payday loans. Borrowers also are allowed to repay the loans in installments over a period of at least 60 days.

But customers of payday lending institutions still are likely to pay the inflated interest on their loans, which still is permitted by state law. A lender can charge $90 in fees for the two-week loan, the equivalent of a 390 percent annual interest rate.

The bill now has moved to the House for consideration.

The passage of a tough Senate bill is a welcome indication that South Carolina finally is taking steps to rein in the worst abuses of payday lenders. Payday lending bills were introduced in both houses of the General Assembly during the last session, but neither bill came up for a vote on the floor.

The House bill would have capped interest rates at 36 percent and limited fees to $5 for every $100 borrowed. We hope the House again will include an interest cap in its bill.

South Carolina now is among 10 states where consumers pay the most for small loans. The number of payday lenders in the state has grown from 274 in 1998 to more than 1,100. The operations have thrived in the state in part because they have been virtually banned in North Carolina and Georgia. Payday lenders have proliferated in York and Lancaster counties because of their proximity to the state line.

New regulations won't eliminate the abuses of short-term, high-interest lending. But putting a brake on serial lending that traps customers into an endless cycle of borrowing would be a big step forward.

Unfortunately, many South Carolinians have few other options when they need a cash to take care of an emergency. And even with exorbitant rates, a short-tem loan can be less expensive overall than a bounced check or a missed car payment -- as long as the loan is paid back on time.

Spokesmen for the industry note that the fees for bounced checks and the number of bankruptcies have risen in Georgia and North Carolina since payday lending was banned. And, they note, the ban has not prevented borrowers from seeking lenders on the Internet who are unregulated by state laws.

Clearly, in addition to regulating payday lending, the state needs to encourage alternative short-term lending programs through banks, credit unions and other institutions that charge reasonable interest.

Meanwhile, though, we are grateful that lawmakers finally are addressing a problem that afflicts thousands in the state. We also salute Sen. Wes Hayes, R-Rock Hill, for playing a key role in developing the compromise bill and moving it forward.