Payday Loan APRs Now in the National Spotlight
Inside Subprime: Aug 8, 2018
By Ben Moore
Payday loans have rightfully earned a reputation as an expensive, high-risk option for somebody looking for fast cash. And yet one in ten Americans has used one. When all that is needed for some quick cash is a valid ID, proof of income, and a bank account, payday loans have become a dangerous solution to money problems for over ten percent of the country.
The payday loan industry is now a $9 billion industry, with over 11 percent of U.S. adults having taken out a payday loan within the last two years. With a national APR on a payday loan at 400 percent (compared to the average credit card APR at 16.96 percent), most payday loan borrowers are “rolling over” their loan because they are unable to pay the finance charges – which are usually service fees and accrued interest. Once a payday loan has been rolled over, a new loan is taken out to pay off the first. As Nick Bourke, the director of consumer finance at Pew Charitable Trusts puts it, “it’s normal to get caught in a payday loan because that’s the only way the business model works. A lender isn’t profitable until the customer has renewed or re-borrowed the loan somewhere between four to eight times.”
While there is very clear need for Americans to be able to access small amounts of cash regardless of their creditworthiness, which can typically block borrowers from receiving loans from banks, the astronomical heights of the payday loan’s interest rates are financially crippling over a tenth of the country’s population. Out of the 50 states, 35 do not have an APR cap on payday loans, with Ohio at the highest up until very recently. Ohio had an average APR on payday loans at 667 percent, with states like Utah, Texas, Nevada, Idaho, and Virginia close behind. The governor of Ohio recently capped payday loan APRs at 60 percent by signing into law House Bill 123, otherwise known as the Fairness in Lending Act. The bill effectively closes a major loophole payday lenders were using to bypass the state’s 28 percent APR cap on loans. The bill also protects the borrower for harassing phone calls from debt collectors. Payday lenders are known to aggressively harass borrowers who do not pay back in time, or are on the road to default. Because of the conditions of payday loans, Payday lenders have access to the borrowers checking account and will siphon the funds if they are not being paid back. The bill also sets a limit to how much of an outstanding principal balance they can carry at $2,500. The bill was stalled for over a year until Speaker Cliff Rosenberger resigned from the Ohio house once the FBI began investigating his travel. But as soon as he left, the bill moved quickly.
The future is unclear for the remaining 34 states who remain silent on capping payday loan APRs. The payday lending industry has found friends within Washington that continue to fight to keep the business model’s bread and butter alive, but attention on borrower safety continues to grow. Ohio’s drastic drop in payday loan interest rates will be monitored closely, and time will tell how the caps affect both borrowers and lenders alike.