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Payday Loans: 2009 Kicks Off with Yet More Regulation

[Jan 4, 2009.]


January 1 2009 saw new payday loan regulations come into force in two states, New Hampshire and Virginia. The new laws are a blow to payday lenders, who are already reeling from anti-payday loan votes on propositions in two other states (Arizona and Ohio) last November.

Law of New Hampshire

The New Hampshire legislation will cap the APR (annual percentage rate) that can be charged on any payday loan at 36 percent, a figure that features in many regulatory frameworks across the nation. According to Forbes, that works out at a total interest charge of $1.48 for a two-week loan-- or roughly 10 cents a day.

Law of Virginia

The Virginia Organizing Project, a grassroots group, has published on its web site a Payday Lending Fact Sheet, which lays out the state's new regulations. These include:

++Payday lenders must allow borrowers two pay periods within which to make repayment;
++One payday lender must not lend to a borrower who already has a payday loan with another lender;
++A payday lender cannot make a loan to a borrower on the same day that that borrower repays another loan;
++All Internet payday loans are illegal and unenforceable in the state.

Law of Economics

Anti-payday loan lobbyists claim that the new laws will help those who find themselves in a 'debt trap', which can occur when borrowers repeatedly roll over multiple loans. They argue that payday lenders charge high (triple digit) interest rates, and that these are unfair.

Industry groups, however, counter by pointing out that those high rates are only annual equivalents, and payday loans typically last for two weeks--not a year. They believe that lenders' costs (taxes, salaries, rent, power, bad debt provisions…) make administering a $100 for $1.48 completely uneconomic. And they point to the wholesale closure of payday loan outlets in states that have--in their eyes--overregulated.

Federal Law?

All of these laws and regulations at state level may soon become redundant. On his web site, President-elect Obama says that it is his policy is to federalize the laws governing payday loans. He plans to introduce a nationwide cap on rates (probably 36 percent), and to introduce tough new restrictions.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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