Payday lending critics scored a win for borrowers this past legislative session by settling for less.
A bill signed last week by the governor accomplishes something that advocates for the poor had pushed for several years to no avail: a reduction in payday loans’ effective annual percentage rate.
The current rate is technically 390 percent, which sounds outrageous and would be if payday loans’ terms were longer. But on the typical two-week loan, the annual figure of 390 percent equates to a reasonable $15 charge for a $100 loan.
In the past, payday lending critics have campaigned for a 36 percent cap, which the industry convincingly argues would be a ban. The advocates showed up this year licking their wounds and asking for a 60 percent cap.
What they got was nowhere close, but they did succeed in ratcheting down fees for those borrowers who might need it most. The new law does this in a roundabout way: by changing the length of loans.
Lenders will have to determine borrowers’ due dates based on how often they get paid. A person who needs money and is less than seven days from their next payday could end up with a loan that lasts more than twice as long as the typical two-week loan.
The fee for that loan would remain the same, effectively bringing down the APR significantly. It’s a little-known aspect of the legislation. (We’ve seen it described only once – in a blog item on TVW’s Capitol Record blog.) But it’s a definite victory for payday lending critics.
Payday lenders conceivably could get around the provision by discouraging loans to people who are nearing their next payday – possibly fulfilling the free-marketers’ claim that payday regulation hurts the people who need quick access to short-term advances the most.
But lenders won’t be able to easily get around another part of the new law, which could send a borrower’s APR diving when it takes effect next year.
People with payday loans they can’t repay can opt into installment plans, buying themselves an additional 90 to 180 days to pay. Some loans could end up near the much ballyhooed 36 percent cap that the anti-payday crowd has made its No. 1 goal.
That crusade continues at the national level – and might make some headway given that President Obama has expressed support for a national cap.
Payday loans, when used and regulated responsibly, meet a legitimate need. Washington and other states are trying to find a reasonable middle ground deserve a chance to prove that government can protect consumers without telling them they are incapable of managing their own finances.
