Require Payday Lenders to Post Interest Rates


A lot of discussion has occurred in Utah lately around the subject of Payday Lenders and the onerous interest rates that they charged. I like the simple solution that was given to the problem in a recent letter to the editor.

In 1994, Utah had about 20 paycheck-cashing lenders. Now there are about 400 of these "payday lenders" in Utah. They cater predominantly to poor and Hispanics. Up until 20 years ago, Utah had established upper limits as to what lenders could charge. In the absence of such limits today, average interest rates charged by payday lenders in Utah are 521%, with some as high as 900%.

A recent letter to the editor of the Deseret News suggests that the state should require these lenders, like all others, to post their interest rates for all to see. I agree.

A statement by the Utah Consumer Lending Association blames such high interest rates on strict Utah regulations:

A senior economist with the Federal Reserve in Manhattan has just concluded a report (1.09.07) that states:

1) Payday lending does not meet the definition of a "predatory lending" product and 2) that the fewer payday lenders allowed in an area (a city, county or state) the more it costs consumers. Simply stated, competition limits payday loan prices.

It is a true statement that the lack of competition encourages higher interest rates among lenders. But the Utah CLA's claim that the State of Utah is responsible for the high interest rates charged by payday lenders is phony and dissimulating. I haven't looked into its claim of what the Federal Reserve said about Payday Lenders, but the rates being charged by some payday lenders in Utah are clearly predatory.

It is hard to imagine that a borrower from any economic class--had they known up front that they would be charged an average of 521% interest and as much as 900% annually on their borrowing--would take out a loan at a Payday lender.

Title Loans vs Payday Loans

Title loans require the placement of collateral for the loan, such as an automobile or a house. Because the collateral can be lost if the loan is defaulted by the borrower, they are considered much more risky than Payday Loans.

Utah State Law (7-24-202) currently requires the lender for title loans to "post [its interest rates] in a conspicuous location on its premises" and to "provide a complete schedule of any interest or fees" charged for a title loan.

Payday loans, on the other hand, are loans for items for which no title changes hands, such as next week's groceries. Payday loans are very commonly issued for a term of two weeks. It is common in Utah for a payday lender to charge a $15 fee for a $100 loan in such a two-week period. This amounts to an annual interest rate of 390%. Currently Utah law makes no requirement for payday loan interest rates and fees to be conspicuously posted.

Utah law should close this predatory gap and require payday lenders to to post their rates conspicuously. In addition, sample loan rates and fees should be required to be posted, such as:

If you borrow $100 now, in two weeks you will be required to pay $115. If you wish to pay the loan back in one year, you will be required to pay $490. This amounts to an annual interest rate of $390.


Such requirements would have two positive effects:

1. It would inform the poor, who are simply trying to make ends meet, that their 'ends' are actually becoming farther apart as a result of such usurious lending.

2. It would embarrass payday lenders into becoming much less predatory members of society.

Comments

  1. I completely agree that payday lenders should be required to post their rates in plain sight -- in bold colors in 24" block lettering. That kind of thing has some kind of salutory effect with gas stations.

    Still, it's kind of like the warnings on cigarette packages. How much impact does it have on the target audience?

    Another idea is to make predatory lending practices illegal. We don't allow gambling in our state because it is essentially immoral and leads to many societal problems. It seems to me that payday lenders float in a similar boat.

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  2. I have never been inside one of these establishments but would imagine that they tell the borrower how much he/she would owe at the end of a two week period. Now I think that any borrower would ask the question, "What if I don't pay that on time?" Then, as a lender, you should be obligated to give this kind of information out. It is the same way with a cell phone co. They dont tell you about all the little fees that turn your 49.99 plan into a 69.00 plan a month. They dont necessarilly tell you up front how much you are going to pay over the two years. It is just simple logic. If somebody is going to pay $15 over 2 weeks for every $100. All the borrower has to do is simple math.
    As far as the "targeting hispanics" go. I don't necessarily believe that is true either. I work at a local financial institution in Utah County, and we have a tendency to hire spanish speakers. Its just a simple fact that there are alot of hispanics in the area.
    In conclusion, I believe that these "payday loan" businesses are just trying to create a convenient way to lend people money. People just need to realize that convenience costs.

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  3. Danny,

    You're right that individuals should be responsible for figuring out their finances, and ultimately they should be able to see whether they're being taken for a ride. One side of me says, 'let the market run its course, and buyer beware.' But...

    The people that frequent payday lenders are those that most likely haven't taken the time to understand finance--because they are likely spending most of their waking hours making the meager paycheck, and often need a little to get by. I think that the Hispanics who frequent Payday Lenders do so because they have recently immigrated and aren't making enough to qualify for a conventional loan, so the Payday Predators are their seeming only choice.

    I think trying to protect these vulnerable groups by requiring conspicuous posting of rates and fees will make them think twice about whether they can wait to buy the groceries (or beer and cigarettes) until after next payday.

    Also, I don't know the answer to your question/concern that they may not be telling borrowers all the penalties, but I assume they probably do not, and agree with you that they should be required to.

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  4. Some minimal posting/disclosure requirements do exist for these lenders. However, a DesNews investigation showed compliance was... inconsistent.

    I agree with you Frank. I find their practices unethical, and despite what they claim, predatory.

    http://deseretnews.com/dn/view/0,1249,635158738,00.html

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