Ohio and Arizona Conquer the Loan Sharks
Hooray for Ohio and Arizona voters, who sent stinging rejections to abusive payday lenders in their states on November 4. Responsible citizens saw through the multi-million dollar promotions — that were sponsored by the industry under the guise of that “reform.” The Predatory payday lenders lost the Ohio ballot referendum by a margin of 2 to 1 and the Arizona initiative by a 3 to 2 margin.
The payday lending industry makes extremely high-interest loans repeatedly to borrowers unable to pay off the debt. According to the Center for Responsible Lending, they typically charge fees equal to 400 percent APR and higher. The average borrower has eight transactions a year that end up costing more in interest than the original debt. Click here to learn more about payday lending.
The federal government recently passed a law capping interest rates than can be charged to members of the military at 36 percent, effectively barring payday lenders from ensnaring them in these loans. Congress should ban payday lenders outright, but in the absense of leadership, states are moving against these loan sharks. Fifteen states and the District of Columbia have capped rates in a similar range.
Ohio was among those states, but after it passed a new law this year capping interest rates at 28 percent, the payday lending industry initiated a ballot measure to repeal it. In Arizona, payday lenders backed a ballot initiative to try to make permanent a temporary measure to exempt payday loans from the state’s 36 percent cap. Payday lenders knew lawmakers were unlikely to renew that exemption when it expired in 2010, but thought they could trick voters into doing it. Frankly, Arizona citizens should be demanding to know why their lawmakers exempted payday lenders from the cap in the first place.
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November 13th, 2008 at 10:37 am
Ms. Rowley, it’s commendable that you’re offering solid advice regarding payday loans. My concern, however, is that you aren’t taking into account irresponsible borrowers who are living beyond their means. This is not predatory lending. “Defining and Detecting Predatory Lending,” a study by Donald P. Morgan, Research Officer, Federal Reserve Bank of New York, concludes that payday loans do not fit the definition of predatory because they are not a “welfare reducing” form of credit. To the contrary, the author suggests that payday lenders enhance the welfare of households by increasing the supply of credit.
I think you need to put things in perspective so your readers understand the product more accurately.
This is indeed a unique offering and, as such, should not be compared to annual credit products because they are simply not the same. So while you can make it look like payday lenders are charging an arm and a leg as a fee, the reality is annual credit products (based on their current APR’s) are much more expensive than payday loans if you convert their fees into two-week terms:
A $15 fee on a $100 payday loan is 391% APR. However, a $100 bounced check with $55.59 NSF/merchant fee is 1449% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR; $29 overdraft protection fee on $100 is 755%- just to name a few.
A 36% fee on a $100 payday loan would amount to approximately $1.38. How does this translate into a feasible operating margin to cover employee payroll, benefits, and other fixed expenses.
All reputable payday lenders are required by CFSA Best Practices to disclose all pertinent information to its customers regarding fees, repayments, extended repayment plans, etc., so that they fully understand the process.
Polls and research have confirmed, time and again, that working middle-class families want their personal financial information kept private and do not want government dictating their credit choices. Unfortunately, the electorate in Arizona and Ohio—made of a majority of people who do not use payday advances—did not reflect the will of the hundreds of thousands of payday advance consumers in those states who need and appreciate access to this short-term credit option.
Hi Paydaylendingrep: I disagree. People take advantage of these loans because they are desperate or ill-informed, and the model should be outlawed on a federal level. I also think aggregious late and overdraft fees fall into this category, and on an APR basis can be even higher than payday lenders. They should also be regulated, since the $40 credit card late fee has no relation to the lenders actually processing costs. Readers interested in learning more about the economic cost of payday lenders should read this report from the Center for Responsible Lending.