Ubiquity of payday loans
Payday loans, thanks to their ease of obtaining, are more and more common. According to Gusto’s research, the volume of people depending on these types of loans has tripled since the coronavirus pandemic. Only 2% of those workers had used a payday loan before the pandemic.
According to the Consumer Financial Protection Bureau, 1 in 4 payday loans are re-borrowed nine times, if not more. It takes an average of 5 months for borrowers to repay their loans and they pay an average of $ 520 in finance charges. So, it is easy to see how these borrowers can easily get into a debt spiral.
It is clear that these loans can have a huge negative impact on the borrowers. Charla Rios, CRL researcher, says that “in addition to repeated borrowing … there is an increased risk of overdrafts, loss of a bank account, bankruptcy and difficulty paying bills.”
She continues, “People are under financial pressure right now and we also know the bottom line and the downsides of payday loans, so these loans are not a solution at this time.”
Lower Payday Loan Interest Rates
Over the past year, many states have started cracking down on what are now called “predatory loans” by introducing specific laws relating to payday loans.
Payday lenders have a reputation for financially taking advantage of unlucky people by charging extremely high interest rates that are impossible to repay.
Payday loans are still widely available in the United States, with more than half of the United States offering unrestricted loans. For many lenders, all that is required is valid identification, an existing bank account, and proof of income.
In an effort to adopt more responsible lending practices, the Center for Responsible Lending analyzed the average APR in different states based on a 14-day loan of $ 300. They revealed that because of the “finance charges” incurred with each loan, many consumers are unaware of the amount of interest they are actually paying.
Abusive loan risk
CRL statistics suggest that approximately 200 million Americans currently live in states where payday loans are not heavily regulated. This means that a growing volume of Americans are exposed to the risk of predatory lending, sometimes with triple-digit interest rates.
Payday Loans In Texas have the highest rates of any state, with a typical APR of 664%. As a benchmark, this figure is 40 times higher than the average credit card interest rate (16.12%). Previously, the highest payday loan rates were found in Ohio, averaging 677%; although that percentage has since been drastically reduced to 138%.
Capped interest rates
Some states have already regulated payday loan interest rates for some time. These are Arkansas, Arizona, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina , Pennsylvania, South Dakota, Vermont, West Virginia and the District of Columbia. In these states, payday loan interest rates are capped at 36% or less.
Most recently, in the November general election in Nebraska, her voters overwhelmingly voted to cap payday loan interest rates at 36%. This was a huge drop from the previous average APR in Nebraska, which was 404%.
In January 2021, Illinois followed suit, passing a bill to cap consumer loan rates, including both payday and car title, at 36%. While the bill is still pending a governor’s signature, it will make Illinois the last state to crack down on payday loan interest rates.
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