Payday Loan Interest Rates – Editorial

21 12 2009

Cap payday-loan interest rates

Editorial published Dec. 20, 2009 – Lexington Herald-Leader

Not that long ago, payday lenders were called loan sharks and what they did was illegal.

Cap Payday-Loans Interest Rates

It’s easy to forget that because the payday-loan industry has amassed so much power and sunk its hooks so deep into the legislature, all in less than 20 years.

Kentucky should join other states, including Ohio and West Virginia, that have turned back the clock on legalized loan sharking.

Fourteen states and the District of Columbia have imposed reasonable limits on how much payday lenders may charge. Without a legal cap, annual interest rates often run above 400 percent.

It won’t be easy. With their market shrinking because of all the new laws, predatory lenders will fight harder than ever to hold on to Kentucky. A few years ago, the state was getting a new payday lender every four days.

It’s obviously a lucrative market — for the lenders.

For borrowers, it’s a road to burial in debt, bankruptcy and homelessness.

Just look at the coalition lined up to support new limits on payday lenders and you get a feel for how wide is the harm inflicted by this industry.

More than 60 members of the Kentucky Coalition for Responsible Lending, from across the state and political spectrum, are lined up in support of limits on payday lending. They include groups that serve the poor and elderly, housing agencies and shelters, asset-building and economic development groups, legal aid, religious groups, advocates for domestic-violence victims, even a couple of financial institutions.

There wouldn’t be such widespread concern if real people weren’t being hurt.

Gov. Steve Beshear is on board. Although Beshear once lobbied for the payday-loan industry, he promised earlier this year to support an annual interest cap of 36 percent on short-term loans. He renewed that promise last week.

As it stands now, three out of four borrowers can’t afford to repay their loans at the end of the two-week period. So they must keep borrowing, and paying exorbitant fees, sometimes until they owe more than they borrowed in the first place.

One advantage of capping the annual interest rate at 36 percent is that borrowers could actually afford to pay off a two-week loan rather than having to keep borrowing.

Beshear noted that Congress imposed a 36 percent cap on loans to military personnel to protect them.

What’s happened since then is instructive. Credit unions stepped up to increase small loans to cover immediate cash needs among military people.

In North Carolina, which did away with payday lending, a study found the loans weren’t missed and that people found alternatives.

The Federal Deposit Insurance Corp. is piloting a small-dollar loan program, encouraging banks to offer affordable small loans as an alternative to predatory lenders.

But banks and other traditional institutions will shy from the short-term, small-cash loan business until the legislature levels the playing field for them by capping rates on payday loans.

The payday loan industry insists that it’s simply filling a demand and saving people from bankruptcy and eviction — which is also what the loan sharks said.

© 2009 Kentucky.com and wire service sources. All Rights Reserved. http://www.kentucky.com

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