Study Finds Payday Lenders Charge 300% Interest (And Yes, It’s Legal)
What is the correct amount of interest to charge for a short term loan? Someone is unlikely to say 300%. Still, it’s a likely outcome if the move towards installment loans among payday loans continues unchecked, according to a review of the payday loan market by The Pew Charitable Trusts.
In a report released yesterday, Pew found that 13 of the 29 states where payday lenders and auto title lenders operate only issue single payment loans typically due in two to four weeks, but the remaining 26 have started to grant installment loans over longer periods with high annual percentage rates between 200% and 600%.
Without any additional limits or restrictions, this should continue, says Nick Bourke, director of the Pew Small Dollar Lending Project. Some states have attempted to reform payday lenders, such as Ohio, which regulated the cost of payday loans to a maximum interest rate of 28% in 2008. where they could make a higher profit.
“Now we see that the prices have gone up,” Bourke said, pointing to interest rates of 275% to 360%. “Loans are not pretty.
Frankly, none of these loans look very nice. And that’s the problem. The payday loan market is often the loan of last resort for Americans who do not have better access to credit. After all, no one would choose to borrow $ 500 and pay off a total of $ 1,200 if they had more reasonable interest rate options. Yet, as I wrote in June, banks and credit unions that could provide short-term loans at a fraction of the cost are reluctant to go into the business without clear direction from the Consumer Finance Protection Bureau.
The CFPB draft rules released in June do not clarify the affairs of banks and credit unions, as Bourke told me at the time. It would seem like a logical and natural solution for banks and credit unions to offer some type of short term loan given that by definition payday borrowers must already have a bank account (payday lenders need direct access to an account for immediate payment). The borrower earns around $ 30,000 per year, or $ 15 an hour, but may struggle to pay bills month to month.
Pew’s research in this area shows that in theory, installment loans would help borrowers by spreading the payment over more time, rather than demanding the balance owed over the typical two-week payday loan term. But without any guidelines or regulatory limits, installment loans from payday lenders often require too much monthly payment of $ 200 or more, double what Pew’s research shows borrowers say they can afford. Payday lenders also offer refinances, which usually incur additional fees and will extend the term of the loan.
What is a reasonable solution? Bourke would like to see guarantees that require affordable payments of 5% of the borrower’s salary, limiting charges to interest charges, rather than also allowing origination fees which can encourage loan reversals, limiting the duration. excessive loan terms – two weeks is too short, but one year is too long and the uncompetitive rate cap – 300% is far too high.
Without such limits, “they can charge any fee, they can set any monthly payment,” Bourke says. “The lender gets virtually unlimited access to the borrower’s account or to the title of the vehicle.”