Over the last year, many state governments have decided that they have had enough of the predatory practices of the payday lenders taking advantage of the people in their states. Laws have been passed in some states capping the interest rate that the companies are allowed to charge or banning the practice as a flawed business model altogether. Although lobbyists and supporters of the industry are predicting that dire problems will face lower income individuals in the states where laws regulating the payday loan industry have taken effect, many law makers believe that they are doing what is best for their constituents by protecting them from the predatory practices of the industry.
The Problem With Payday Lenders
At the heart of the issue is the business model that payday lenders use to make money in the industry. The loans that they extend to consumers must be paid back within a two week period, which is often not long enough for the person to earn the additional money needed to pay back the entire loan, resulting in a cycle of borrowing new loans to pay off the old loans. Experts estimate that the majority of the individuals that take out a payday loan get trapped within this cycle of debt, taking out an average of 12 loans throughout the year and paying the payday lender hundreds of dollars in interest for the loan.
Another issue at the heart of the problem is the interest rate that the payday lenders are charging to consumers for taking out the loan. The payday lenders argue that their loans come with terms of $15 for each $100 taken out as a loan, which is not an excessive amount by their calculations. When calculated as an APR, which is currently the only legal way to represent an interest rate applied to a loan, the lenders are charging their consumers 391% interest on the loan, an amount that lawmakers say is exorbitant and wildly unfair to consumers.
The States’ Solutions
Many states are attempting to find a solution to the issues that are occurring within their jurisdictions in regard to the payday lending industry. The first regulations of the industry were actually issued by the federal government, when Congress capped the interest rate that payday lenders were allowed to charge military service personnel at 36% after seeing how many of America’s service members were falling into the trap set by payday lenders in stores often located just outside of military bases. In response to the new law, the payday lending industry stopping making their short term loans to service members altogether and closed many of their stores near military bases.
State governments took notice and began to pass their own laws limiting the reach of payday lenders in their state.
– Washington, DC and North Carolina banned payday lending within state borders altogether.
– Georgia made payday lending a violation of anti-racketeering laws, meaning payday lenders could be prosecuted for doing business in the state.
– Oregon, Ohio, and New Hampshire capped payday loan interest rates at 36%, with only Oregon allowing the industry to charge an additional $10 fee per loan.
– Arkansas capped the interest rate that payday lenders were allowed to charge each loan at 17% and the state attorney general announced that the law would be strictly enforced.
More than a dozen states have passed laws limiting the practices of payday lenders within their borders. It will be interesting to see how many other states will follow suit.