A bill being considered by the Pennsylvania Senate expanding payday loans would target 1 in 4 Philadelphia households, according to a report released Tuesday by City Controller Alan Butkovitz.
Payday loans are short-term, unsecured, high-interest loans often issued under the agreement the borrower will pay it back on their next payday.
"Payday loans are a form of predatory lending that does not build credit in any way," Butkovitz said in a statement.
"They often quickly lead consumers into a downward spiral of rapidly mounting fees and interest. These loans are virtually designed to ensnare borrowers in a debt trap."
The state senate is mulling Senate Bill 975, which would remove certain consumer protections surrounding payday loans and create a tier-loan system in which borrowers could be subject to a 28 percent flat interest rate, a 5 percent application fee per loan and a 5 percent processing fee.
In Butkovitz's report, titled "Impact of Legalizing Payday Loans in Philadelphia," he found 133,173 underbanked households in Philadelphia – about 25 percent of the city's households – are being targeted under the legislation.
"Underbanked" indicates residents have an account with a bank or credit union but continue to rely on alternative financial services like check cashing, payday loans and pawn shops.
Butkovitz said in a release that since payday loan companies require access to a borrower's bank account, that population would be at risk for taking out the loans and facing attendant high fees and interest rates.
The report further found that if payday lending were to be expanded, it is unlikely check cashing institutions would obtain payday lending licenses to offer loans to low-income Philadelphians, as of the 144 licensed check-cashing establishments in the city, more than half are located in neighborhoods with poverty rates above 26 percent.
"Philadelphia already struggles with the highest poverty rate of any large U.S. city," Butkovitz said in a statement. "Mixing high-interest, short-term loans will negatively impact our most vulnerable citizens."
Butkovitz instead recommended residents seek alternatives to payday loans, including taking out credit union signature or personal loans and receiving free financial literacy from the city's Financial Empowerment Centers.
Butkovitz issued a copy of his report to all Pennsylvania lawmakers, along with a letter urging them to vote against any legislation expanding payday lending in the state.