Take it from former payday borrowers: loan sharks who left the state will not be missed.

A new report from the North Carolina Commissioner of Banks has found that the absence of the payday loan shops that once dotted North Carolina's strip malls and street corners has made little difference to most survey respondents. Of the former borrowers who have noticed a difference, twice as many report that they are better off without payday lending.

This comes as no surprise to those who understand the predatory nature of payday lending. These loans are structured so that borrowers typically cannot pay them off, and must keep renewing them for months on end. The interest payments—about $50 each pay period for a $300 loan—never reduce the loan principal.

Now North Carolina's banking regulator reports that low- and middle-income families, including former payday borrowers, are using a range of options to cover financial shortfalls, most of them much cheaper than getting caught in a cycle of high-interest debt.

The study reports the former payday borrowers' own words, confirming that loans were easy to get into and difficult to get out of, that they were encouraged to keep re-opening the loans, and that they were relieved when the shops closed.

North Carolina refused to renew a payday lending exemption from the state's 36 percent interest rate cap in 2001 when it expired, making the practice illegal again under state law. In 2005 and 2006, the North Carolina Attorney General and Commissioner of Banks enforced the law against payday lenders who tried to evade it through partnerships with out-of-state banks, forcing them to follow the law or leave the state.

Those states that are still struggling to control predatory payday lending can take away two things from analysis of the North Carolina experience:

  • A reasonable interest rate cap keeps predatory lending out while leaving plenty of responsible consumer lending intact, and
  • Working families are better off without destructive lending that creates new crises instead of solving an emergency need.

We appreciate this important work from the North Carolina Commissioner of Banks.

For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.