Arizona and Ohio Ballot Measures May Curtail Reasonable Payday Loan Regulations
By Karen Harris, Supervising Attorney
In recent years several states have enacted annual percentage interest rate (APR) limits that eliminate the triple-digit interest rates charged by payday lenders. The payday lending industry is now fighting back by sponsoring ballot initiatives that threaten these sensible payday lending regulations in two states: Arizona and Ohio.
A “no” vote on Proposition 200 in Arizona will ensure that payday lenders’ current predatory practices will no longer be permitted when the exemption for such lenders from the state’s 36 percent APR cap expires in 2010. In Ohio, by contrast, a “yes” vote on Ballot Issue 5 will create a 28 percent APR cap on payday loans, while a “no” vote will allow payday lenders to continue charging up to 391 percent interest rates. Thus Arizona voters should vote “no,” and Ohio voters should vote “yes,” on these critical ballot measures to protect their communities from the debt traps caused by abusive payday loans.
Interest Rate Limits and the Debt Trap
People usually obtain payday loans by using their anticipated paychecks as collateral. The payday lender, for a fee, gives the borrower cash and promises not to cash the check until the borrower’s next payday. Since most borrowers cannot afford to pay off the loan rapidly, they continuously renew the loan, accruing additional fees with each renewal and resulting in a triple-digit APR on the loan. A 2007 report by the Center for Responsible Lending found that 90 percent of the payday lending business was generated by borrowers who had become trapped with five or more loans or renewals per year. As a result, payday lending costs American families $4.2 billion annually in excessive fees.
The payday lending industry contends that interest rate limits in Arizona and Ohio will unfairly restrict access to short-term credit for low-income individuals. This argument, however, is not consistent with data from states that have already regulated payday loans. For example, a UNC Community Capital report on North Carolina’s payday lending ban found that “more than twice as many former payday borrowers reported that the absence of payday lending has had a positive, rather than negative, effect on their household.”
Although some states have eschewed rate caps in favor of alternative forms of regulation, the Center for Responsible Lending concludes that “the only meaningful way to address the debt trap is through a comprehensive small loan law with an interest rate cap.” In fact, 12 states and the District of Columbia have already saved their citizens more than $1.4 billion by capping small loans at or around 36 percent. Ohio and Arizona can follow their example, but only if voters in those states take appropriate action on November 4.
Payday Loan Reform in Illinois
In 2005 Illinois capped payday loans at 36 percent through the Illinois Payday Loan Reform Act. However, this law did not protect consumers whose loans were for 120 days or more. Payday lenders simply extended their loan terms to 120 days or more in order to resemble consumer installment loans and be exempt from the law. The Shriver Center is working with the Monsignor John Egan Campaign for Payday Loan Reform to close this loophole and propose consumer protection amendments to the Consumer Installment Loan Act.
Tags: payday loans, predatory lending
October 31st, 2008 at 5:04 pm
Well said
October 31st, 2008 at 5:31 pm
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October 31st, 2008 at 5:38 pm
Payday loans are a loan choice that millions make. The freedom of choice is one that should never be taken away. When used wisely payday loans can help save money and get you through tight financial spots.
November 1st, 2008 at 10:09 am
I find that getting payday loan is a better choice then bouncing a check or having late fee’s on a bill that is due.
November 1st, 2008 at 7:01 pm
I would really like to see an article about payday loans that gives consumers another option rather than doing a cash advance when an emergency arises. You are so against it and call the industry “predatory”, yet you have no solution to the problem. If the industry were to be shut down, you would be putting millions of people out of work and millions of consumers with no other options. A lot of the clients using payday loans simply cannot qualify for a loan at a bank, so that’s not an option. What is that person to do when they are a couple hundred bucks short on their rent? Get a $75 late fee for being a few days late? Or, the better option, pay $16 for a $200 payday loan for a week?
November 1st, 2008 at 11:13 pm
[...] an interesting post from the Sargent Shriver National Center on Poverty Law: Arizona and Ohio Ballot Measures May [...]
November 2nd, 2008 at 7:21 pm
I’ll be voting yes on issue 5! The Ohio legislature acted appropriately in June by reforming the payday lending industry and closing the exemption that the predatory practice has received since 1996. I don’t believe that 391% APR amounts to financial freedom. It’s time to lower interest rates and provide Ohioans with options that are fair and reasonable, not those that are designed to trap them in debt! Vote yes on issue 5!
http://www.yesonissue5.com
November 3rd, 2008 at 9:30 am
Forget if you agree with pday loans or not- FOCUS on the fact that the Ohio General Assembly thinks they have the right to control what financial products are available to the citizens of Ohio. Big brother style.
Forget if you have used a PD loan or not– FOCUS on the fact that other consenting adults do and are capable of making their own decisions, based on their individiual situations. Who are we to say no, you can’t use that credit card? Or no you can’t use that bank?
Forget everything else — FOCUS on the fact that eliminating payday loans DOES NOT eliminate the need for short term financial options. I bet 99.9% of the OGA doesn’t have to worry about the day to day necessities the rest of are dealing with. They have insurance, pensions, well paying jobs.
Forget about the Pday loan argument — FOCUS on the controlling and spending of our household money by the state. Considering our current economic situation… I vote for less intrusion!! PLEASE let me manage my own darn $$ since the gov’t has shown they are not responsible, accountable or budget conscious. Ohio>> 60M in debt!!
Forget about the Pday loan side– FOCUS on what else the government is going to decide in the future (under the guise of “paternalism”) that we aren’t capable of handling as adults. Restricting how much can be spent on food? alcohol? cigarettes? housing? gambling? clothes?
FOCUS on the fact that the OGA is intruding on our personal financial decisions… where does it stop?? Why do they think they know better what will work for us than we do? We live it every day!!!
The Issue of 5 is waaaay bigger than PD Loans >> its about Financial Freedom of Choice, which I consider to be a BASIC FUNDAMENTAL RIGHT!
***NO on ISSUE 5 in Ohio!****
November 3rd, 2008 at 9:39 am
“This feel-good activism can often have the stench of paternalism and a fundamental belief that working-class Americans are incapable of making their own financial decisions.” - Niger Innis of the Congress of Racial Equality
November 3rd, 2008 at 9:40 am
“If Wall Street is getting a “trillion-dollar payday loan,” then “why can’t a single mother have the ability to fix a flat tire or get some medicine for her child? Because Bill Faith wants to save her from herself? It’s nonsense.” - Niger Innis of the Congress of Racial Equality
November 3rd, 2008 at 9:59 am
http://www.buckeyeinstitute.org/article/1243
November 3rd, 2008 at 11:21 am
Knowing about the changes and reforms regarding payday loans is very helpful. Payday loans can be a great benefit in certain situations. Thank you for your article.
November 3rd, 2008 at 11:23 am
What people fail to understand, Valerie, is that a 28 or 36% cap would NOT mean that people could get payday loans at that rate. It would mean they couldn’t get them at all. Period. Payday Lenders would have to close their doors. The current APR is NOT representative of the payday loan. The loans are short term meant to get you to your next payday. Because of this the the actual interest paid is greatly reduced from the APR. Leave the Payday Lenders alone and allow the people decide how to manage their money.
November 3rd, 2008 at 1:07 pm
The only accurate way of calculating the interest rate on a payday loan is to say that it is 15%. When you pay back $115 to borrow $100 it does not add up to 391%. There is a subtle but important difference between a
“percentage rate” and an “annual percentage rate.” Reporters and advocates who ignore this difference are not doing their homework or are just being sloppy.
http://www.buckeyeinstitute.org/article/1238
VOTE NO on 5
November 5th, 2008 at 8:57 pm
With the crisis of the economy taking off it is no wonder that more and more people are turning toward payday loans in order to get through from payday to payday.
November 11th, 2008 at 5:07 pm
I can relate to this ! , I’ve heard some goody things about this blog ! I bookmarked it on my favorites and will visit it again for more interesting posts like this one, Thanks
November 28th, 2008 at 11:22 pm
One who goes for a payday loan should make more research on payday loans and the companies that offer. Since there are few companies that offer payday loans with bit less interest. Moreover one should make use of the loan properly and repay it as early as possible.