Carl Ruby knew his hometown of Springfield, Ohio, had plenty of problems, but one thing in particular caught his eye about three years ago. He counted five McDonald’s restaurants in the town of roughly 60,000 people—and 18 payday lending stores.

Ruby, the senior pastor of Springfield’s Central Christian Church, had heard troubling accounts of people turning to payday lenders when they couldn’t pay their monthly bills—and then struggling with exorbitant interest rates and recurring fees. He says he worried initially that payday lenders might take advantage of the many immigrants his church serves. But he soon learned that low-income people of all ethnicities and backgrounds use the loans. And the more he looked, the more alarmed he became.

“I was just shocked when I saw what the interest rates were,” Ruby says. “I thought it would be maybe 30 or 40 percent, and I thought that was bad. But then I saw rates were 500 percent, 600 percent.”

Ruby had landed on a topic that The Pew Charitable Trusts has been researching since 2011.  In most states, Pew’s consumer finance project found payday lending markets characterized by unaffordable payments, harmful business practices, and excessive prices.

Ohio was arguably the worst. For years, it had the nation’s most expensive payday loans—in some cases, the same lenders charged four times more in Ohio than they did elsewhere. Six payday loan chains in Ohio controlled more than 90 percent of the market. Some of the loans charged more in fees than they provided in credit, and repayment often took up more than a third of borrowers’ paychecks.

Ohioans tried to address the payday loan problem years ago. Voters overwhelmingly backed a 2008 ballot initiative in favor of a 28 percent rate cap that the Legislature had passed earlier that year. But the lenders simply registered as brokers, which enabled them to charge unlimited fees—leaving Ohio’s payday loan customers with far fewer protections, and much higher prices, than those in other states.

The 12 million Americans who take out payday loans each year are usually workers whose incomes sometimes can’t stretch to the end of the month. Their credit history, if they have one, often disqualifies them for bank loans. But to qualify for a payday loan, they need only have a regular paycheck and a checking account. The borrower goes to a payday lender—often in a storefront with colorful neon signs—and obtains a small loan, which averages $375 nationally. The lender receives a postdated check from the borrower’s bank account, or permission to debit the account on the borrower’s next payday. In either case, this puts the lender first in line for payment before any of the borrower’s other debts or expenses. In many cases the loan is due to be repaid, with interest and fees, in about two weeks, although some loans carry longer terms.

But most borrowers find that sacrificing around one-third of their paycheck to repay the cash advance leaves them unable to cover their bills, so they renew the loan, usually repeatedly.

Millions of Americans can find themselves in such straits. The Federal Reserve says 40 percent of U.S. adults cannot handle an unexpected $400 expense without borrowing money or selling possessions.

In a 2013 report, Pew noted that more than 3 in 4 payday borrowers in the U.S. “rely on lenders to provide accurate information about the product.” Lenders typically “describe loans as ‘safe,’ ‘a sensible financial choice,’ and ‘the best alternative to meet their current needs’ for a ‘one-time fixed fee,’” the report explained.

Pew found, however, that the average payday loan borrower in the U.S. had a loan out for five months of the year, not just the advertised two weeks. In Ohio, owing $300 for five months typically cost $680 in fees and interest alone. By contrast, in Colorado, which enacted reforms in 2010, the average cost of such a loan was $172.

The 2013 Pew report also found that:

• 58 percent of payday loan borrowers have trouble meeting monthly expenses at least half the time.
• Only 14 percent of borrowers can afford to repay an average payday loan out of their monthly budgets.
• The choice to use payday loans is largely driven by unrealistic expectations and desperation.

Sixteen states have essentially banned payday lenders. But the rest haven’t, and they have usually regulated them loosely, permitting annual percentage rates above 300 percent.

Pew has found that when states don’t enact strong consumer safeguards, loan prices are about three to four times higher than is necessary for credit to be widely available, says Alex Horowitz of Pew’s consumer finance project. “For credit to help people, it has to be affordable. Average payday loans take up one-third of a borrower’s next paycheck. Borrowers have told us again and again they can’t patch such a big hole in their budget.” 

In 1983, Newsweek named Springfield, 45 miles west of the state capital of Columbus, one of America’s “dream cities.” It had little crime, a thriving downtown, and ample manufacturing jobs, especially in the auto industry.

But by 2012, a headline in the Canadian newspaper The Globe and Mail blared: “Welcome to Springfield, Ohio, the ‘unhappiest city’ in the U.S.”

The dark greeting was based on Gallup polling that tracked the collapse of manufacturing, rising unemployment and crime, and an exodus of young people seeking a better life.

Derek Drewery experienced the downturn directly, and forcefully, around 1997. Then a young enlistee at the Wright-Patterson Air Force Base, some 20 miles southwest of Springfield, Drewery needed money to replace the worn-out ball joints in his Chevy Blazer. He didn’t have it.

“Some friends told me about this place where people got loans,” Drewery says. That was his introduction to payday lending.

Drewery left a loan store with the money to repair his car, “but I had very little understanding of it. Most people don’t,” he says. The lenders “didn’t do a good job at all of explaining it. Very quickly I realized I had made a mistake, and I didn’t know how to get out of it.”

He renewed the loan several times at additional cost because he couldn’t afford to repay the full balance all at once. “Basically they come after you with fees,” he says. “I was borrowing one week to pay the next. It really got bad.”

Despair set in. “You find yourself in a place where you feel like the world has its thumb on your neck, and they’re coming after you,” Drewery says. “I felt there was nowhere I could turn, nothing I could do.”

He says he cut back on nearly everything, including meals. Finally, with a total payoff almost in sight, “my dad sent me the last little bit. He’d learned that I shared my last box of Cheerios with my little dog.”

Drewery, now 42, thinks he paid about $3,000 to fully retire his debt—about four times as much as he originally borrowed.

Now an electrician and the pastor of a small nondenominational church in Springfield, Drewery heard that Ruby and other civic leaders were conducting meetings and gathering key players in the community to learn more about payday lending and its impact on borrowers. “Carl and I hit it off right away,” he says. Drewery shared his experiences, and his concerns about his own congregants, and joined the effort.

Pew already had identified Ohio as one of the nation’s most problematic payday lending markets, chiefly because of the broker provision that lacked safeguards on loan size, fees, or affordability. “That stood out to us as a very clear-cut example of where the state law was failing,” says Nick Bourke, who directs Pew’s consumer finance project.

A Springfield Chamber of Commerce official attended a Pew presentation about payday lending during a trip to Washington, D.C. When he got home, he suggested that the Springfield group and Pew join forces.

They did, with Ruby, Drewery, and other Springfield citizens providing local knowledge and sharing their experiences while Pew supplied data and technical expertise. Pew had already developed safeguards for reforming payday lending based on years of research. Key provisions included affordable payments, reasonable time to repay, and prices no higher than necessary to make credit available.

During a series of trips in 2016 and 2017 to Columbus, the group found a receptive listener in state Representative Kyle Koehler, a Republican from Springfield. “Ohio was the epicenter of the payday lending problem in the United States, and Springfield was the epicenter of the payday lending problem in Ohio,” he recalled in a recent interview. He agreed to sponsor legislation that would better regulate, but not eliminate, Ohio’s payday lending industry.

Pew provided data, evidence from other states’ experiences, and historical perspective on payday lending to Koehler; his Democratic co-sponsor, Representative Mike Ashford of Toledo; and legislative staff members.

More than a year after Koehler and Ashford introduced the bill, it passed the Ohio House without amendments. But the fight intensified in the Senate, and Ruby, Drewery, and many others traveled to Columbus to testify at hearings.

All of them, including Koehler, brought powerful stories. He told of a woman who obtained a payday loan of $2,700, and after paying the lender $429 a month for 17 months, still owed $2,700. Like many borrowers, Koehler says, she mistakenly thought she had an amortized loan whose principal would shrink with each payment. “They just didn’t understand,” he says.

The industry fought fiercely, and some colleagues told Koehler he was risking his political career. At times the bill appeared doomed: “Payday Lending Reform Effort Falters,” said a June 2018 headline in The Blade of Toledo.

But supporters kept the bill on track. “I was sitting in the Senate chamber when it passed,” Ruby says. “A great moment.”

State officials say the new law—which took full effect in April—will save Ohio consumers $75 million a year. Meanwhile, the industry’s warnings that the law would eliminate payday lending in Ohio have proved untrue. Payday lender Speedy Cash was issued the first license under the new regulations in late February. Lower-cost lenders that avoided Ohio because they didn’t want to charge brokerage fees have also obtained licenses and begun offering credit in the state, now that there is a transparent, level playing field to promote competition.

“Pew was very instrumental in the bill’s passage,” Koehler says. “I cannot thank them enough for helping us back up, with data, what we knew was going on.”

Pew urges other states seeking to better regulate the payday loan industry to look at Ohio’s new law as a possible model. It features strong protections against illegal online lending and gives state regulators authority to supervise lenders, monitor the market over time, and publish annual reports.

And, perhaps most importantly, it balances the interests of borrowers and lenders so they can both succeed. “Under the conventional payday lending model, the lender’s success depends on their ability to collect money from the borrower’s checking account rather than the borrower’s ability to repay the loan. Ohio fixed that, so payments are affordable for the customer and the loan’s terms are also profitable for the lender,” says Bourke.

The new law gives borrowers at least three months to repay unless monthly payments are limited to 6 percent of the borrower’s gross monthly income, giving lenders flexibility and borrowers affordability.  To protect against long-term indebtedness, total interest and fees are capped at 60 percent of the loan principal. To give borrowers a clear pathway out of debt, the law sets equal installment payments that reliably reduce the principal. Lenders can charge up to 28 percent annual interest and a maximum monthly fee of 10 percent of the original loan amount, capped at $30—meaning that a $400, three-month loan won’t cost more than $109. Before the law’s passage, the same loan would have cost a borrower more than three times that amount.

“Our idea was never to abolish the lenders,” Drewery says. “We do need the benefits of having places like that—if they are in check, if they are reasonable, not like a bunch of lions running after a little baby gazelle.”

Charles Babington, a Washington journalist, wrote about the state of the U.S. news media industry for the fall 2018 issue of Trust.