By Alex Mikulich, Ph.D., JSRI Research Fellow
An “industry” that has emerged over the past forty years and that has been booming over the last decade is known as “payday lending.” A payday loan, sometimes called a paycheck advance, is a small, supposedly short-term loan that allows a borrower to cover urgent needs such as rent or mortgage payments, utilities, and/or medical bills. According to the Center for Responsible Lending (CRL), between 2000 and 2006, total sales volume of payday loans had nearly tripled from $10 billion to $28 billion nationally.1 CRL finds that 90 percent of payday lending revenues are based upon fees stripped from trapped borrowers—the typical borrower pays back $793 for a $325 loan.
The predatory nature of payday lending has become a concern of church, consumer, and social justice advocates in the Gulf South region. The Mississippi Economic Policy Center describes four key predatory characteristics of payday lending.2 First, payday loan terms are typically two weeks. Studies demonstrate that it is mathematically impossible for borrowers to repay payday loans within two weeks.3 The typical payday loan borrower earns an annual salary of about $25,000 per year. The working poor in Louisiana and Mississippi, those who earn incomes less than $25,000 per year, are most likely to use payday loans when they are unable to pay rent or mortgage, utilities, or medical bills.
Second, lenders charge triple digit interest rates—the national average Annual Percentage Rate (APR) charged for a payday loan is 470 percent. In Mississippi, for example, a borrower is typically charged 572 percent APR for a two-week loan. This explains how borrowers typically pay back nearly $800 for a $325 loan.
Third, loan renewal or “loan flipping” traps the borrower in a cycle of indebtedness that demands additional fees as borrowers are unable to repay their loans when they are due. “Rollover” or renewal fees typically amount to $50 every payday until the borrower can pay back the original loan. Ninety-nine percent of payday loans are made to repeat borrowers and 91 percent of payday loans are made to borrowers who have had five loans or more per year from multiple lenders.
Fourth, a final key indicator of predatory lending is the fact that lenders have no concern for the borrower’s repayment capacity. The amount of the loan is not based on the borrower’s credit history or ability to repay the loan within the context of the borrower’s current financial responsibilities, assets, and liabilities. Borrowers generally only have to have a checking account and demonstrate employment to be able to receive a payday loan. Numerous studies detail how payday lenders locate offices within impoverished communities and take advantage of the most vulnerable working poor both in urban and rural areas.4
Catholic social teaching is absolutely clear that society and people of faith are called to care for the most vulnerable of society and that care has long included a focus on lending practices. In the middle ages, St. Thomas Aquinas developed a critique of interest rates in general—called usury—in a completely different context, namely, an economy that did not use money and that was not based on markets. Yet, the kernel of truth in Aquinas’ teaching and Catholic social teaching endures. Aquinas and Catholic social teaching begin with God’s commandments in Torah:
If you lend money to any of my people with you who is poor, you shall
not be to him as a creditor, and you shall not exact interest from him. If
you ever take your neighbor’s garment in pledge, you shall restore it to him before sundown; for that is his over covering, it is his mantle for his body; in what else shall he sleep? And if he cries to me, I will hear, for I am compassionate. (Ex: 22:25-27)
Aquinas’ basic point against charging any interest is that it is a violation of justice. For Aquinas, following Aristotle, justice concerns what is due to another in a relationship of equality. Theological and moral equality is based upon the fact that human persons are made in the image and likeness of God—the Imago Dei. Equality rooted in the Imago Dei means that society and individuals have the responsibility to treat all persons with dignity that affords them the ability to live, work, and worship free of oppression.
The Catechism of the Catholic Church completes Aquinas’ key insight. The problem of payday lending is not merely one of exorbitant interest rates; a more fundamental issue is at stake—the commandment not to kill directly or indirectly. Payday lending literally deprives the poor of life—extracting financial, emotional, and health costs that only increase the burden of poverty. The Church states:
The acceptance by human society of murderous famines, without efforts to remedy them, is a scandalous injustice and grave offense. Those whose usurious and avaricious dealings lead to the hunger and death of their brethren in the human family indirectly commit homicide, which is imputable to them. Unintentional killing is not morally imputable. But one is not exonerated from grave offense if, without proportionate reasons, he has acted in a way that brings about someone’s death, even without the intention to do so.5
Although the Church and society no longer condemn interest rates in general, predatory payday lending charges fees and interest rates reaching far beyond any reasonable social, moral, or economic standard of human dignity, decency, and justice. By crafting legislation that protects the working poor from predatory lending, social justice and consumer advocates in Mississippi and Louisiana are following the lead of 15 other states—including Arkansas and Georgia in the South—that have enforced bans against payday lending.6
Advocating for bans on predatory lending is not only wise theologically, socially, and morally, it has been wise financially for states that have banned payday lending. The Center for Responsible Lending conservatively estimated that the eleven states that had banned payday lending by 2006 have saved over $1.4 billion dollars for their citizens. Conversely, the costs of predatory lending to Gulf South citizens in 2005 was a staggering billion dollars: $225 million in Alabama, $156 million in Florida, $311 million in Louisiana, $135 million in Mississippi and $259 million in Texas. The time has come to ban this modern form of usury.
 Uriah King, Leslie Parrish, and Ozlem Tanik, “Financial Quicksand: Payday Lending sinks borrowers in debt with $4.2 billion in predatory fees every year,” Center for Responble Lending, (2006). Available online at http://www.responsiblelending.org/payday-lending/research-analysis/financial-quicksand-payday-lending-sinks-borrowers-in-debt-with-4-2-billion-in-predatory-fees-every-year.html
 “Mississippi Payday Lending Fact Sheet,” Mississippi Economic Policy Center (2009), available online at http://www.mepconline.com/images/admin/spotedit/attach/4/Payday_Lending_Fact_Sheet_FINAL.pdf
 Megan S. Knize, “Payday Lending in Louisiana, Mississippi, and Arkansas: Toward Effective Protections for Borrowers,” Louisiana Law Review Vol. 69, (2009): 317-347, p. 324.
 Alice Gallmeyer and Wade T. Roberts, “Payday lenders and economically distressed communities: A Spatial Analysis of financial predation,” The Social Science Journal 46 (2009): 521-538.
 The Catechism of the Catholic Church, #2269. Available online at http://www.vatican.va/archive/catechism/ccc_toc.htm