How APRs are Used to Slander Payday LoansOne of the many reactions to the economic recession in the United States has been the expansion of the payday loan industry. At first unchecked and unbridled, payday loan lenders multiplied rapidly across the country as low-income families looked for alternatives to help them through the difficult times. When some of these people fell further and further into debt local and federal public officials looked to curtail interest rates and establish laws intended to protect their citizens. Unfortunately, in some cases the regulations have caused the citizens further economic strain, and in most cases the statistics that politicians quote are misleading.
Typically, payday advance loans carry an interest rate of around $15 per $100 lent, with a term limit anywhere from 7 to 31 days. Now, that doesn’t seem unreasonable. However, these loans are not meant as long-term solutions, and roll-overs into another pay-period can carry an additional interest rate. Politicians looking for statistics to show that payday loans are usury have been showing the
APR rate (annual percentage rate) of these loans that are intended to be a week, or at the most a month long. When they do so they come up with exorbitant interest rates of hundreds of percentage points! Obviously, no one would agree to a loan carrying an interest rate of several times the amount of the original loan. If used as they’re intended no payday loan will be a year long, and thus it would not be subject to multiple roll-overs and a massive interest rate.
Political pressure has resulted in many states passing laws to cap APR rates on payday loans. In most of these states the maximum annual interest rate is now 36%, forcing lenders to charge less than $1.50 on a $100 loan that last a few weeks. These regulations have caused payday lenders to become extinct in many states (including
Oregon and Arizona).
The Consequences of Payday Loan RegulationsWhile politicians claim, and might truly believe, that capping the interest rate on payday loans is to the benefit of their citizens, many more people in desperate need of the service are now left out in the cold, having to find other means to come up with quick cash. The growth of the payday loan industry is indicative of one thing: there was a demand for the service. Many people in this country live paycheck to paycheck; the slightest mishap or unexpected expense could have drastic effects on their lives. Say someone unexpectedly gets sick, or their car breaks down, instead of taking out a simple loan that allows them to spread out the cost over several weeks, they’re now forced to choose between medicine, their car and food - Or medicine, the car or paying the electric bill.
The politicians fighting for these regulations never have to feel the consequences of their own actions. They never feel the difference of not having the option to take out a payday loan. It’s the low-income members of society who seek a
cash advance because they have nowhere else to turn. Most banks won’t offer them a loan to begin with, and they certainly don’t offer small, short-term loans.
Whatever happened to personal responsibility? Politicians contend that payday loans prey on the poor, but no one is forcing people to sign these loans. If they pay back the loan on time and only use payday loans in case of emergencies, there would be no need for regulation. The solution to all of this is regulation that makes sense, giving those who need a loan the option to get them, while still protecting those who may fall into perpetual use.