Ohio Governor Ted Strickland has signed legislation that caps the allowable interest on a payday loan in that state at 28%. In Ohio, the going interest rate for these short-term loans had been 391%. The new law also limits a payday loan to $500 and requires the loan to be at least 31 days instead of two weeks. The Community Financial Services Association, which represents a majority of the payday loan companies in the country, claims the rate cap will force the 1,600 stores in Ohio to close. Any lending outfit – including pay day loan shark operations – that can’t make it charging borrowers 28% interest should close its doors.
Payday lenders are “legalized loan sharks” and must be regulated. Over the past decade, this industry has made a financial killing off the backs of lower income citizens. The industry’s model is to trap people in a cycle of debt and keep them captive. The bulk of payday loans are made to folks who are getting loan after loan after loan. According to a December 2007 report from the Center for Responsible Lending, the vast majority of families taking out payday loans are ensnared in long-term debt, “making them worse off than they would be without high-cost payday lending.” The study found that more than 60% of payday loans go to borrowers with 12 or more transactions a year. Payday loans are marketed as two-week loans, but the report concludes they only work as a one-time quick cash solution about 2% of the time. Payday loan sharks prey on the most desperate working people in our society and that’s morally wrong.
The new law in Ohio is “a huge deal,” according to Jean Ann Fox, director of financial services at the Consumer Federation of America. She says, “the tide has turned on legalizing these high-cost small loans.” Michigan was the last state to allow pay day lending and that was back in 2005. Last year, Congress capped the annual interest rate for payday loans to military families at 36%. And more than a dozen states have taken steps to put controls on payday lenders. For example, the following states have taken action:
Georgia has the toughest statute on the books. It makes payday lending a violation of anti-racketeering laws.
Payday loans are no longer permitted in North Carolina or the District of Columbia.
In Oregon, payday loans are capped at 36%, plus an initial fee of $10.
In New Hampshire, payday loans will be capped at 36% beginning in January of 2009.
Payday lenders pulled out of Arkansas, after the state attorney general told them he would enforce the constitutional cap on interest at 17%.
If you think I don’t like payday lenders, you are absolutely correct. Unfortunately, my State of Alabama has given them a safe haven where they can continue to take advantage of low-income people. Hopefully, our legislators will eventually put some real controls on this industry. In the meanwhile, we should commend those states which have reigned in this industry and we should encourage others to follow suit.
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