Proposition Takes Aims at Predatory Colorado Payday Loans Practices
Inside Subprime: Oct 22, 2018
By Ben Moore
Payday loan laws are on the ballot in Colorado. Proposition 111 attempts to curb payday loan annual percentage rates by placing a cap at 36 percent. The bill would prevent payday loan providers from adding any additional fees, including origination and monthly maintenance fees. It would also decrease the cost to get a payday loan from $293 to $53. Colorado would join a growing list of states mandating APR caps on payday loans.
In 2016, the average APR on a payday loan in Colorado was 129 percent, with some loan interest rates hitting up to 180 percent. Data from 2016 also showed that 23 percent of Colorado payday loans ended in default.
Advocates for Proposition 111 emphasize the importance of setting a reasonable cap, and argue that borrowers are paying too much for small loans. Many borrowers find they need to take out subsequent payday loans to stay current on their payments. The conservative Colorado Springs Gazette Editorial Board announced an endorsement of Proposition 111, stating that “predatory lending exploits human trauma in a way a civilized society should not allow. At 36 percent, loan sharks will remain an option for people with sudden financial needs. And at 36 percent, the borrower has some chance of getting out of debt.” According to the Colorado Attorney General’s Office, a $392 payday loan in 2016 would cost the borrower around $120 in additional fees.
Colorado’s payday loan interest rates may seem high, but when compared to other states, they are relatively tame. Some states have APRs that climb above 600 percent. Still, payday loans in Colorado have caused financial harm to many residents. Denver resident Kim Ray found herself trapped in debt after taking out a payday loan to help with her mortgage payment. She had tried to borrow a loan from Wells Fargo, but was denied. It took Ray over three months to pay off the interest on her $500 payday loan, and required her to take on a second job.
Jon Caldara of Independence Institute has spoken out against Proposition 111, claiming that payday loan customers are “terrible credit risks” who “rack up massive debts to then declare bankruptcy, leaving the lender with nothing” which in turn causes the payday loan provider to “charge wildly high rates and fees.”
But payday loan businesses grow rapidly in communities of poverty, areas with a high percentage of residents under the age of 15 (a metric researchers use to indicate large families), and communities with large African-American populations, emphasizing the industry’s tendency to prey on customers with little to no financial options. Payday loan providers also tend to target veterans as well as isolated residents, such as elderly citizens or victims of domestic abuse.
While payday loans can provide immediate relief from financial hardship, the high interest rates and fees can negatively impact a borrower’s future financial health. Colorado’s Proposition 111 attempts to protect residents from the disreputable practices of predatory lenders while still allowing payday loan providers loans to borrowers with bad credit.
For information on predatory payday loans, check out all of our Subprime Reports.