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Payday Loans – Propositions of Interest in Arizona and Ohio

[Nov 5, 2008.]


Voters in Arizona and Ohio yesterday opted for greater regulation of payday loans. Ohio's Issue 5 caps annual rates at 28 percent, while Arizona's Proposition 200 has even stricter rate limits and tougher rules for lenders

Payday Loans Largely Unregulated

According to the Consumer Federation of America (CFA), states have historically fulfilled the role of protecting borrowers from predatory lenders. But the CFA claims that 37 states fail to offer consumers effective protection when it comes to high cost payday loans.

How Much Is Too Much?

Campaigners for greater regulation say that borrowers of too many payday loans pay very high interest rates, and cite APRs (annual percentage rates) ranging from 390 percent to 780 percent. They also claim that not paying payday loans back on time sometimes leads people into vicious cycles of debt.

But the industry rejects that view. The Community Financial Services Association of America (CFSA) claims that lenders typically charge $15 for a two-week $100 borrowing and that much of that cost goes on setting up the loan rather than on interest. It also says that it's impossible actually to pay triple-digit APRs without rolling over a two-week loan very many times. Rolling over even once is illegal in some states, and elsewhere lenders who are CFSA members limit the number of rollovers allowed to four.

Fair or Foul?

Jean Ann Fox, the CFA's director of financial services, comments: “Americans who fall prey to abusive lending practices pay more to borrow money and often end up trapped in an endless cycle of debt. Unfortunately, many states aren’t providing consumers with the protections they need to avoid being ripped off by modern day loan sharks.”

But, again, lenders disagree. The CFSA is worried that tighter rules will reduce choice by driving lenders out of over-regulated states, and says: "The bottom line is that consumers don’t want others making decisions for them. And they especially don’t like the idea of people (who have probably never been short of cash) dictating where they can or cannot borrow money."


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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