Colorado Payday Loan Stores Might Close Under New Limits
Inside Subprime: March 4, 2019
By Lindsay Frankel
With a new cap on interest rates, payday loan providers may have difficulty profiting in the state of Colorado, forcing them to close down shop. Some stores already closed after voters approved Proposition 111 on the November ballot.
The new law, which took effect February 1st, limits interest rates on payday loans to 36 percent without outlawing the industry altogether. But Alex Horowitz, senior officer at Pew Charitable Trusts, said payday lending businesses will close anyway.
“In 15 other states that have a similar law on the books, there are no payday loan stores,” Horowitz said. “There won’t be payday loans anymore in Colorado.”
“The research is mixed on whether it’s better to eliminate lending like this or have it in a heavily regulated market with strong consumer protections like Colorado had prior to the ballot initiative,” he said. “Borrowers do things when loans are unavailable like use pawn shops or overdraft their checking accounts.”
For people with bad credit or who lack established credit history, payday loans may have provided a lifeline when banks and credit unions failed to meet their needs. But payday loans are a risky choice, especially for low-income borrowers who don’t have any alternatives. The combination of short terms and high interest rates makes it difficult for borrowers to pay off these loans on time, which leads to renewals or rollovers and mounting interest. The payday loan debt cycle can quickly get out of hand.
Pew research indicates that once borrowers become trapped in debt, they typically seek options they were trying to avoid to begin with, such as asking friends and family for help. While payday loans are advertised as a quick way to access cash in an emergency, they typically cause more financial harm than good in the long run.
Not all types of predatory lending have been outlawed in Colorado. While risky auto title loans that often lead to repossession are illegal in the state, people who have valuable items can still get a loan from a pawn shop. In exchange for collateral, a pawnbroker will lend a borrower about 25 to 60 percent of the item’s resale value. But those seeking to recover the item will pay exorbitantly high interest rates.