FRANKFORT — A survey of low-income families in nine Kentucky counties showed that many turned to payday lenders because they couldn’t access or didn’t trust banking services.
That’s one of the findings released Monday from a Kentucky Youth Advocates 2008 survey of families and their financial needs. Fifty-two people in Boyle, Campbell, Christian, Jefferson, Kenton, McCracken, Mason, Pulaski and Warren counties participated in focus groups and interviews over three months in 2008.
The 2008 survey is a follow-up to a 2007 Kentucky Youth Advocates and Brookings Institution study that showed that a quarter of low-income Kentucky families did not have a bank account. More low-income families also used high-cost check cashing services —approximately 31 percent — compared to high income families — 5 percent.
The most recent study looked at real-life experiences of low-income families.
Short-term lending services provide immediate cash but often charge high interest rates. Some studies show that Kentuckians pay $131 million a year in fees to payday lenders.
“Working families are struggling now, more than ever, to get food on the table and to make ends meet,” said Terry Brooks, executive director of Kentucky Youth Advocates. “When economic times are rough, Kentuckians are forced to find immediate cash, and unfortunately many find it where the costs and consequences are high.”
Steven Schlein, a spokesman for the Community Financial Services Association of America, a short-term lending trade group, said the survey does not adequately reflect the experiences of most payday loan users.
“We have tens of thousands of customers in Kentucky and very few complaints,” Schlein said.
The survey found that many families didn’t realize how much interest they were paying on the loans. Some interest rates can be as much as 400 percent on an annual basis.
Some said they turned to payday lenders only after traditional banks refused to help because of their poor credit histories. Others said they had to take out multiple pay-day loans to pay off the first loan, keeping them in a cycle of debt.
Many of the participants also said they were distrustful of all financial institutions because of fees associated with banking.
The report suggests Kentucky create alternatives to payday loans, such as the “Save It! Loan” program run by the Mountain Association for Community Economic Development and the Appalachian Federal Credit Union. The program offers 10-month loans with a cash savings account.
Other recommendations include using churches to increase finance literacy and encouraging banks and the government to reach those who are mistrustful of banks. The report also calls for a cap on payday loan interest rates.
But Schlein said the survey found that many people go to payday lenders because traditional financial services won’t serve them. A 36 percent cap on interest — which has been proposed — on payday loans would shut down many short-term loan operations, leaving people with no options, he said.
“They are contradicting themselves,” Schlein said.
During the 2009 General Assembly, Kentucky Youth Advocates and others pushed for a cap on payday loans but that legislation failed to gain traction. Another bill, which would create a database of loans, did pass the General Assembly. The new law also includes a provision that places a 10-year moratorium on new payday lenders.
Brooks and others said the bill didn’t go far enough to curtail payday lending practices.
Gov. Steve Beshear said in March that he would support an interest rate cap on payday loans and has said he will work with advocates during the 2010 session to get legislation passed.