Payday loans under attack again
Controversial and hotly debated, payday loans are under legislative attack again throughout the nation. These short-term unsecured loans, criticized for high annual rates of interest and deemed predatory by detractors, are often the only available avenue of credit for those with damaged credit histories or low incomes for smaller amounts of cash, typically under $1500. Current legislative strategies to combat these loans include interest and loan amount caps and additional taxes upon those offering such loans. However, a recent study provides some illuminating statistics concerning traditional banks, making the payday loan matter much less cut and dried as it may seem at first glance.
Recent Payday Loan Legislative Efforts
While most of the new legislative efforts against payday loans have to do with capping interest rates and limiting loan amounts, there is also another legislative approach being taken. It is a classic approach, well known to those in other industries that have fallen into disfavor politically and socially during the past couple of decades, including the tobacco and alcohol industries – a special tax.
There are 12 states in which payday loans are completely banned. Ohio recently joined the states that are moving to increase regulations on this type of lending. According to a report published on April 30,2008, at Business First of Columbus , the Ohio´s House passed a bill designed to increase payday loan regulation in the state.
The bill, which is on its way to the state´s Senate, "would cap annual percentage rates on payday loans at 28 percent, extend the repayment period to 31 days from 14 days and cut the maximum loan amount to $500 from $800." As astonishing as it may sound, the Ohio bill requires "consumers who take out two loans in 90 days to complete a finance education course through the state."
In New Hampshire, reported Seacoastonline.com on April 20, 2006, legislators passed a bill this past February that set a limit of 36 percent on the interest that payday loan makers could charge. That law comes into effect in January of 2009. On April 9, 2008, the International Herald Tribune reported that Arkansas Attorney General Dustin McDaniel said "most payday lending companies in Arkansas say they will close or stop issuing high-interest loans to avoid being sued for violating the state constitution." McDaniel, according to the International Herald Tribune story, "said his office received word from 52 companies that they will comply with a cease-and-desist letter he sent them last month."
In Virginia, the Alexandria city counsel has taken another approach, in addition to capping interest rates and limiting the amount and frequency of payday loans. They are planning measures that would greatly increase the taxes levied upon business making payday loans and are, according to a story in the Washington Post on April 21, 2008, hoping to use those additional tax revenues to fund consumer education programs for low income residents – those they believe are most likely to use payday loan services.
These are just a few examples of the legislative efforts to regulate or even eliminate payday loans in various states and municipalities throughout the nation. The reasoning behind such legislation tends to be similar in most regions of the country.
Payday loans under attack again
The primary complaints against payday loans have to do with the interest rates. The annual percentage rate of interest is, indeed, high as compared to other avenues of credit. However, payday loans are not even remotely supposed to be a matter of annual interest rates. They are short-term loans, typically about 2 weeks, or the period between paychecks. To use APR as a means of comparing a payday loan to other types of credit seems a bit misleading, as the average payday loan is paid off long before a year passes.
There are other costs associated with credit, such as fees, and when those are factored in, the cost of a payday loan doesn´t seem quite so astronomical, especially when compared to the forced short-term loans that banks inflict upon their customers today. Now that banks have become so fee happy, there is a standard operating procedure that ensures they get a significant overdraft income each year. Rather than refusing to approve a transaction with a debit card if the funds are not in the account, the bank extends the so-called courtesy of allowing the transaction, then charging a steep fee for it. It is not uncommon for bank customers to report paying $30 for an overdraft of mere cents.
In fact, The Center For Consumer Freedom recently published an article citing a study done by East Carolina University´s Department of Economics in which researchers found that "the [interest] rates of payday loans were twenty times lower than the alternative." And in their study, the alternative was the short term loan forced on consumers by banks in the form of "bank overdraft services." In other words, banks often engage in more abusive and predatory short term lending practices than the payday lenders that consumer groups and politicians like to complain about.
Often payday loans are one of the few lines of credit available to those with damaged or bad credit and to those with lower income levels. Legislators are typically far removed from such everyday types of concerns, having relatively little trouble getting the financing they want or need. The reasoning behind many legislative efforts against payday loans often smacks of a paternalistic condescension – ´those´ people are not intelligent enough to make responsible financial decisions and must be protected from themselves by lawmakers.
The recent round of legislative attacks on payday loans offers yet another instance of government interference in matters of personal choice in which the government has no business. The concept that government officials have the right to limit the amount and frequency of borrowing on the part of an individual, and even have the right to insist that people who are deemed to be borrowing too often must attend re-education programs, is appalling. The only area of concern in the matter of short-term lending that government should have a role in is the prevention of deceptive lending practices and fraud. And, they should start their work by addressing the far more predatory and abusive tactics of today´s banks .
Source:: americanchronicle.com
