Payday Loans: An Uncertain Future

[Dec 17, 2008.]

 

Payday loans are, right now, a state’s issue. In other words, it’s up to each of the 50 states to decide whether--and to what extent--to regulate such borrowing. But all that may soon change.

How states now regulate payday loans

According to an August 2008 report from the Consumer Federation of America (CFA) and the National Consumer Law Center, 38 states choose not to provide protection against ‘high cost’ payday loans. Although in November, Colorado voter’s opted for greater regulation so that will bring the score down to 37.

The CFA defines a ‘high cost’ loan as one with an APR (annual percentage rate) of over 36 percent.

New regulations?

President-elect Barack Obama’s stated policy will change all that. He plans a federal law that will regulate payday loans across the United States.

The Obama/Biden web site says:

Cap Outlandish Interest Rates on Payday Loans and Improve Disclosure: Obama and Biden will extend a 36 percent interest cap to all Americans. They will require lenders to provide clear and simplified information about loan fees, payments and penalties, which is why they'll require lenders to provide this information during the application process.

Should payday loans be federally regulated?

Most experts agree that payday loans should only be used as a last resort. Family, friends or a credit union are all cheaper ways to raise funds to tide one over for a few weeks. However, for many payday loans are the only option available. And they are often very much cheaper than an unauthorized bank overdraft.

The payday loans industry points to the cost of administering small, short-term advances, and says that it is unfair to annualize a rate that typically applies to just a two-week borrowing. After all, some lenders point out, the cost per day of renting a car at the airport is much higher than that for leasing a car for two years.

Certainly, federal regulation will prevent some people from entering a spiral of debt. However, it might also remove the one way remaining for some to alleviate short-term misery.

 

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.