Need a $500 loan to make it through until your next paycheck drops? In Texas, the average consumer will be on the hook to pay that back, plus another $645 in interest.
That’s according to a new Pew Charitable Trusts analysis of payday lending that ranks Texas among the most expensive states for consumers to borrow money.
The report is an update of a nationwide analysis of payday lending performed by the research center eight years ago. The state of Texas’ payday lending practices has changed little over that time, Pew’s previous findings show.
“We have an extremely expensive payday and auto title lending market,” Texas Appleseed director Ann Badour said. Texas Appleseed is a nonprofit advocacy organization pushing for equitable policies in Texas.
“People are making these payments, and they never make progress on paying down the principal,” Badour said. “Or if they do, it’s trivial progress. And then they come to a point where they just can’t can’t sustain it.”
Sometimes called small-dollar loans, payday loans target Americans who are living paycheck to paycheck or are in financial distress. Critics of the high-cost payday loans say that the loans can trap low-income Americans in a cycle of debt.
Pew’s updated analysis of Texas payday lending practices pulls from state regulatory data as well as advertised products from the six largest payday lenders in the nation. Texas consumers paid $1.5 billion in fees on payday loans in 2021, according to the analysis.
The average consumer in Texas who took out a payday loan was required to pay 527% of the loan amount in the fees and interest over a four-month installment plan. The only states with higher average rates were Utah, Nevada and Idaho.
Pew found that payday lenders tend to charge the maximum amount for loans under state law, and only charge lower rates when they’re required to.
The payday lending industry and critics of regulation argue that they provide vital access to credit where banks choose not to, and that the high fees they charge are appropriate given their clients’ credit histories.
Over the past decade, states including Colorado, Hawaii, Ohio and Virginia have passed laws strengthening protections for consumers accessing payday loans.
In some of those states, pro-consumer protections enacted by lawmakers mean that borrowing from the same payday lending companies can cost up to four times less in fees for the consumer, according to Pew.
Washington, D.C., and 16 states have already enacted caps on loan rates charged by payday lenders.
Dozens of municipalities in Texas have taken action to curb predatory lending practices over the past decade, including Houston and Dallas.
Dallas’ law was the first in the state. Enacted in 2011, it required payday lending businesses to register with the city, stopped them from front-loading fee payments and limited the number of times a loan could be refinanced.
In response, payday lenders introduced new types of loans called unsecured personal loans and signature loans with similarly high fees to the ones being targeted by local regulations.
And in 2019, Texas Attorney General Ken Paxton issued an opinion saying those loans were legally different from loans regulated by local ordinances, like in Dallas, and that local laws did not apply to them.
In 2021, Dallas tightened its laws even further to include more types of loans and close loopholes created by the 2019 opinion.
In Dallas, payday lending businesses remain a common sight in communities of color and areas like southern Dallas with lower median incomes. A WFAA-TV (Channel 8) investigation recently counted 88 payday lenders south of Interstate 30.
Local ordinances have been somewhat effective in regulating the industry, but payday lenders have continued to introduce new types of loans to evade rules, Badour said.
Statewide attempts to create broader regulations have failed. In 2013, legislation that would preempt local ordinances and place caps on payday lenders failed because state legislators couldn’t agree on how to write the regulations.
“It’s true that people need access to credit, and we need to think and be more creative. But a bad product is not the answer,” Badour said.
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