New Indiana Legislation Could Limit Interest Rates on Payday Loans
Inside Subprime: Feb 5, 2019
By Lindsay Frankel
New Indiana legislation could potentially limit interest rates on payday loans, if support from consumer advocates is enough to counter the lobbyist argument against the bill. Senate Bill 104 would cap Annual Percentage Rates at 36 percent for loans of up to $605 with a two-week term. A similar bill was killed last year and never reached the Senate.
The coalition of supporters for the legislation includes faith-based organizations, consumer advocacy organizations, nonprofits, and others. These advocates contend that payday loans are predatory in nature, causing undue financial harm to vulnerable people. Payday loan providers in Indiana can legally charge up to 391 percent APR. On average, it costs borrowers $440 to take out $300 for five months in Indiana, according to Pew Charitable Trusts. The exorbitant costs associated with payday loans trap borrowers in debt, draining $70 million per year in fees from borrowers and sometimes even leading to bankruptcy.
But lobbyists for the payday loans industry say there’s a demand for small-dollar credit, and payday lenders need to charge high rates to lend to this risk profile. Indiana law made payday loans available in 2002; the intent of the authorization was to give subprime borrowers access to credit. Lobbyist Brian Burdick told lawmakers that if the rate cap goes into effect, “members of our association will be gone and I don’t know who fills the gap.”
Yet the Consumer Financial Protection Bureau found that nearly four out of five payday loans get renewed or rolled over, and most borrowers spend more on payday loan fees than they would on other late fees because they end up trapped in debt.
Mark Russell, director of advocacy and family services at the Indianapolis Urban League, told lawmakers that the interest rate on payday loans in Indiana “is hideous and designed to trap borrowers into a spiral of ever-increasing debt.”
Sen. Eric Bassler, R-Washington, chairman of Senate committee on insurance and financial institutions, asked consumer advocates and payday lending industry lobbyists to find common ground before the hearing adjourned. “I would challenge both sides on this issue to figure out a good and appropriate and just solution,” he said. “My gut instinct is, and I have no inside knowledge about votes or anything whatsoever, but my gut instinct is that the status quo will not be maintained.”
Whether a mutually agreeable solution is possible, public consensus supports increased regulation of payday loans. A survey from Bellweather Research and Consulting found that 84 percent of Indiana voters believe that payday loans are harmful. Furthermore, 88 percent of Hoosiers support limiting interest rates on payday loans to 36 percent, as Senate Bill 104 would accomplish.
Lawmakers will need to reach a decision in less than four weeks in order to meet the deadline for moving bills out of the Senate.