Payday Loans and High Interest Rates
Payday Loans have astronomically high interest rates, some as high as 400 percent, that take advantage of people in desperate need of cash. If you pay quickly, you are off the hook for a little, but if you don’t, a $300 loan can end up costing you about $800.
If you see them you should run the other way. But the truth is in these hard times, Payday loans are not going anywhere soon.
In Washington, the House is addressing the Payday Loan Reform Act, H.R. 1214. Rep. Luis Gutierrez (D-IL) introduced the bill. He chairs the Consumer Credit Subcommittee. But according to a report, The Center for Responsible Lending, a Washington D.C. consumer group, does not agree with the bill because it doesn’t address the high cost of the short-term credit and the requirement that it must be paid back with a single paycheck.
HR 1214 does nothing to stop the 391 percent annual interest rate of a typical loan and does nothing to stop borrowers from being strapped in the high-cost debt. Lenders keep finding ways around the restrictions that do exist in some states. In Virginia for example, the lenders have open-ended loans, and in Illinois and New Mexico lenders avoided the laws in their states by changing their product to high-cost installment loans. Florida has tried payment plans but that has not slowed down the number of trapped borrowers.
The Center advocates a federal law that eliminates payday loan flipping and a cap on the rate of annual interest.
By contrast, the Center likes S. 500 introduced by Illinois Sen. Dick Durbin and California Rep. Jackie Speier (H.R. 1608) that put a 36 percent annual interest cap on consumer loans. Putting a cap on the double or triple-digit annual interest rate is the only way to stop abusive payday loan flipping. Already military families are protected by the cap that Congress applied in 2006.
15 states plus the District of Columbia have stopped the consumer abuse by imposing a cap in the 36 percent range.
The Payday industry doesn’t like legislation restricting what they do. From a practical view, pawn shops say if Senate Bill 500 passes, they will have to close their doors. The shop owners say that the average pawn loan is just $80, so the high interest is needed just to stay in business.
As experienced personal injury attorneys in Florida who help people in difficult situations everyday, it is tempting to say all Payday activities should be shut down; however, the reality is that people need to get their hands on short-term money. Capping the interest rate and eliminating Payday loan flipping seems to be a reasonable first step to stop lenders from preying on someone’s misfortune.