How would you like to borrow money at an interest rate of 500 percent? Does that sound like a raw deal? It does to me, and that’s why I’m happy to see some lawmakers in Madison taking steps to institute common-sense limits on the interest rate imposed by payday loan stores. Wisconsin is one of only a few states in the country that does not impose a cap on the interest rate on consumer loans, after the State Legislature repealed an 18 percent interest rate cap on consumer loans in 1995. Shortly after the interest rate cap was repealed, payday loan stores began popping up across Wisconsin like weeds in an otherwise well-kept lawn, and in 2008 payday lenders made 1.68 million loans in Wisconsin, lending $723.2 million at interest rates that routinely top 500 percent:
“It’s basically legalized loan sharking, from our point of view,” says Kathleen Day, a spokesperson for the Center for Responsible Lending, a Durham, N.C.-based independent research group that has set its sights more than once on the payday loan industry.
Emily Mills over at the Lost Albatross has some great thoughts on payday loans posted on her blog, and I’m in agreement with her that while payday loans may have a niche in our society, they should still be responsible in regards to their lending practices. Interest rates that can climb into the hundreds of percents are predatory, and in the long run they do more long term harm to consumers than the short term good the loans may have done for those same consumers. It’s absurd to think any lender can get away with charging an interest rate of 100 percent or more, and as Kathleen Day was quoted as saying, it’s akin to legalized loan sharking.
Thankfully, lawmakers in Madison have taken notice of the practices of payday loan stores, and State Representative Gordon Hintz, a Democrat from Oshkosh, has drafted a bill that would cap at 36 percent the rate on consumer loans of $5,000 or less, including auto title loans and other instruments in the ever-evolving consumer credit industry. While still a pretty high number, a cap of 36 percent on the interest rate payday loan stores can charge consumers seems far more responsible than the rates those stores can currently charge. It’s time for some common sense limits in the payday loan business, and that’s why I’ll be rooting for Rep. Hintz’s proposal.
H/T to Emily Mills.
Does anyone know the difference between usury laws and payday loan regulation? Why are both necessary?
There are no usury laws anymore in Wisconsin, we had an 18% cap but eliminated it in the 80s.
WOW! 18%? That is less than some of today’s credit card rates.
Thanks for letting me know that Wisconsin has no usury laws.
Does anyone find it interesting that the Free Market in Pay Day Loans does not drive down interest rates? I do.
These places need to be staffed and they have physical locations that require a rent payment. How will they survive? Where will the people who use and need this service get short term loans?
E, are you saying they’ll probably not make it if they can’t charge 500% interest?
Resulting response: Placing a 36% fee cap on the payday advance industry will take away a viable consumer choice. If [BLANK SENATOR/STATE] places a cap on the industry, [HE/SHE/IT] will only hurt the very consumers [HE/SHE/IT] seeks to protect. Capping the industry will eliminate a valuable consumer choice.
For more information, check out: http://www.wddagroup.org
Seonah, explain to me how 500% interest rates don’t hurt consumers. I’d love to hear some explanation on that, Mr./Mrs./Ms. Lobbyist.
Put interest in context Zach… You’re thinking APR, these loans are for 2 weeks at the most just to get over a hump so the interest accrued is not as bad as the numbers sound. If you pay something like an 80 dollar fee on 400 dollars to keep yourself out of a bind then you do it. The fees are spelled out before you get the cash. Where else can these people go?
Borrowing from family or reducing expenses are the optimal solutions for people with short-term financial problems. When that isn’t an option, payday loans are a viable alternative when one compares other common short-term credit fees expressed in terms of an APR: $100 payday advance = $15 fee (391% APR); $100 bounced check = $54 (1409%); $100 credit card balance with late fee = $37 (965%); $100 utility bill with late/reconnect fees = $46 (1203%).
As for the the high interest rates leading to high profits, a recent study cited by the Buckeye Institute concluded that the average profit margin for payday loan only stores was only 3.57%. Your typical commercial lender has a profit of 13.04%, which is much higher than your local payday lender.
As silent E said, payday loan companies are completely transparent. People borrowing know exactly what they will owe before they take out the loan. There are no hidden fees. Without payday loans, people are forced to pay even the higher interest associated with late fees and reconnect fees.
The fact remains that if you do not like the terms then do not use the product