Payday loans wiped out in Arkansas -- is this a trend?
Filed under: Ripoffs and Scams, Consumer Ally
Three years ago more than 250 payday lenders were doing business in Arkansas. As of this week, all are out of business.Arkansas represented a unique opportunity for opponents of payday lending. The state constitution includes a cap on interest rates that state officials and advocates used to drive the industry out of Arkansas.
Nine months ago, the Arkansas Supreme Court overturned a state law as unconstitutional for permitted bloated interest rates to be charged setting the stage for the demise of the industry there.
Payday loans allow borrowers to get short-term cash advances on their paychecks typically at extremely high interest rates plus fees.
In 14 other states and the District of Columbia, rate limits prevent high-cost lending.
"More and more, states are passing or enforcing laws that reinstate the long dormant notion that usury – in this case short-term loans at hundreds of percent APR – is bad for the economy, not good for it.," said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, told WalletPop.
Another consumer advocate deeply involved in educating people about the dangers of payday loans cheered the events in Arkansas.
"This is a great victory for the broad consumer coalition in Arkansas which has worked for years to drive predatory lending out of the state and enforce their constitutional usury cap to curb high-cost lending," said Jean Ann Fox, director of financial services for the Consumer Federation of America.
Arizona voters enacted curbs set to take effect in 2010. In the other states, interest rates can run from an APR of 156% (Texas) to 1,955% (Missouri) to no cap at all (Delaware, Idaho, Nevada, South Dakota, Utah and Wisconsin).
"The perils of using payday loans include paying triple-digit interest rates for very short-term balloon payment loans, risking bounced check fees from both the payday lender and the borrower's bank when checks written to secure loans are returned unpaid, and becoming trapped in repeat borrowing," Fox said..
"Using payday loans increases consumers' chances of ending up in bankruptcy, falling behind on paying other bills, and losing their bank accounts."
AP
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Reader Comments (Page 1 of 1)
8-14-2009 @ 8:36AM
Ryan Harris said...
This is another example of the media bashing payday lending without checking the facts. What ever happened to balanced journalism?
A study by Clemson University found that payday loans do not cause bankruptcy "which casts doubt on the debt trap argument against payday lending." Read the study for yourself:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1291278
And, all this hype about high interest is based on annual percentage rates. APR is not an accurate measure of cost because a payday loan is a short-term two week loan and not an annual product.
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8-14-2009 @ 1:58PM
Jon Schultz said...
You have to remember that payday lenders, by and large, are operating under very narrow exemptions to state lending laws, and thereby cannot tailor the product properly to meet the needs of consumers. For example, borrowers who know from the beginning that they are not going to be able to repay the entire loan on their next payday should be able to be offered an installment payday loan instead, where they would leave several checks instead of one, to be cashed on successive paydays. This would save those customers the stress of having to revisit the store for one or more refinancings - or worse, having to go to another store to get another loan to pay back the first, where refinancings are not allowed. Plus, installment payday loans could be offered at a lower APR than single payday loans since the lenders would not incur the costs of processing rollovers and those loans which are taken out just to cover another loan, and returned check charges for borrowers would become relatively rare since they would be making smaller payments. The main problem is over-regulation, not under-regulation, although disclosure requirements can be strengthened.
But even as things stand Ed Mierzwinski is wrong that payday loans are bad for the economy, because customer satisfaction surveys show that a large majority of payday loan borrowers are satisfied with the service, realizing that the alternatives to getting a payday loan, in many situations, are far less desirable. And payday lenders should no more be blamed that some customers get themselves in a bind by taking out too many loans than ice cream companies should be blamed because some customers eat too much of their product and become obese.
It is simply a superstition that you can draw a line between a "reasonable" APR and one that is "excessive." The APR does not tell you if the loan being offered will help the consumer and it does not tell you how much profit the lender is making. From a consumer's standpoint the APR is only useful for comparing loans of different fee structures which he or she qualifies for. Apart from that the consumer should simply look at the dollar cost of the loan and decide whether it is worth the benefit which the loan confers. But people who want to accuse others of greed, for one reason or another, perpetuate the myth that high-APR loans are necessarily bad for consumers, which is in fact false.
We need strong disclosure laws to ensure that consumers are not being tricked into transactions which they don't understand, but apart from that we should value and protect freedom of commerce as much as we value and protect freedom of speech. Informed, consensual financial agreements between willing parties should not be banned in the name of consumer protection. Consumers know best what is best for them and they need to be given more options, not less.
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8-20-2009 @ 4:18PM
Jennifer said...
As a pay day lender, I see our customers every day. Most people use a PDL responsibly. Of course there are some that don't. The same people that don't use their credit cards responsibly, or pay their bills on time I suppose. Our customers come to us for financial relief. They had a sudden car repair, need the cash, and STILL want to pay their utility bills on time ect. We help them. They come to us with help paying their bank Nsf charges, because they made a math error. We help them, even if the banks won't. Banks get BONUSES off of fee income in which Nsf charges fall under.....why would they help? We also have an extended payment plan here in Ohio. If folks get into a bind paying us back, we help them with that too.
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8-21-2009 @ 10:14AM
Belinda said...
Payday advance customers are educated, hard-working, middle-class Americans who face unbudgeted or unexpected expenses between paychecks and want and need access to short-term credit. When states enact laws like this, they are saying that the public is not smart enough to make there own financial decisions. When someone makes a choice of needing money in an emergency situation, they look at what is the best option for them at that time. Prohibiting payday lending only forces consumers to use the other, more costly short-term credit products available, such as overdraft protection ($30 on average), late fees on credit cards ($35 on average) and other bill payments and off-shore Internet lending. I personally would rather pay on average $15 per hundred dollars borrowed than pay $30 to cover a $5 bounced check. Either way I am going to pay the money back so I chose the most cost efficient option. I think this is what the majority of people do.
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