In recent months, several states have moved to limit interest rates on payday loans in an effort to prevent consumers from getting carried away by these traditionally expensive loans.
In the November general election, voters in Nebraska voted overwhelmingly to cap payday loan interest rates in the state at 36%. Before the ballot initiative passed, the average interest on a payday loan was 404%, according to the Nebraskans for Responsible Lending coalition.
In January, Illinois state legislature passed bill that will also cap consumer loan rates, including salary and car title, at 36%. The bill is still awaiting Gov. JB Pritzker’s signature, but once signed, it will make Illinois the last state (plus the District of Columbia) to cap payday loan rates.
Yet, these small loans are available in more than half of the US states without many restrictions. Typically, consumers simply need to enter a lender with valid ID, proof of income, and a bank account to get one.
To help consumers put these recent changes into perspective, the Center for Responsible Lending analyzed the average APR for a loan of $ 300 in each state based on a loan term of 14 days. Typically, payday lenders charge a “finance charge” for each loan, which includes service charges and interest, so consumers are not always sure how much interest they are paying.
Currently there are a handful of states (shown here in green) – Arkansas, Arizona, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Dakota of South, Vermont and West Virginia – and DC that cap payday loan interest at 36% or less, according to CRL.
But for states that don’t have cap rates, the interest can be exorbitant. Texas has the highest payday loan rates in the United States. The typical APR on a loan, 664%, is over 40 times the 16.12% average credit card interest rate. Texas’ position is a change from three years ago, when Ohio had the highest payday loan rates at 677%. Since, Ohio has placed restrictions on loan rates, amounts and terms which came into effect in 2019, bringing the typical rate down to 138%.
About 200 million Americans live in states that allow payday loans without heavy restrictions, according to CRL. Even during the pandemic, consumers are still looking for these loans with triple-digit interest rates.
The rate of workers taking out payday loans has tripled due to the pandemic, a recent Gusto survey of 530 workers in small businesses find. About 2% of those employees said they had used a payday loan before the start of the pandemic, but about 6% said they had used this type of loan since last March.
While payday loans can be easily obtained in some areas of the United States, their high interest rates can be expensive and difficult to repay. The research carried out by the The Consumer Financial Protection Bureau found that nearly one in four payday loans are borrowed nine or more times. In addition, borrowers take about five months to repay loans and cost them an average of $ 520 in finance charges, Pew Charitable Trusts reports. This is in addition to the original loan amount.
“In addition to repeated borrowing, we know there is an increased risk of overdrafts, loss of bank account, bankruptcy and difficulty paying bills,” said Charla Rios, researcher at CRL. Other research has shown that the stress of high cost loans can also have health effects, she adds.
“People are financially strained right now and we also know the results and harms of payday loans, so these loans are not a solution at this time,” Rios said.
To verify: Nebraska becomes latest state to cap payday loan interest rates
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