This is the second in a three part series on payday loans. In the first part, I described the practice and shared some information from a business point of view. While the companies that
give these loans suffer a lot of criticism, their overall profitability is not outside the norm and
they are in a high-risk business (they have a lot of folks who walk away from their debts).
In this part, I intend to share information on what two states (Ohio & SC) are doing to curb pay-day loans and why. Thanks again to David for the tips on Ohio's proposed legislation. In the final part, I'll share my opinion.
I lump payday loans and title loans together, as you typically see these businesses side-by-side.
Title loans typically carry a higher loan amount (up to $1,000 in some cases) and are for longer
periods of time (30 days as opposed to two weeks). Of course, they hold the car title as collateral. According to bankrate.com, "the possible loss of your car makes (title) loans dangerous. If you lose your car, everything else just cascades... You can't access your job or health care and, therefore, you fall behind on other bills, and it makes life almost impossible."
In some states,lenders can only flip a title loan six times. In other states, there are no laws
that require the lender to reimburse the borrower for a car sold for more than what is owed on the original loan. So the lender can make money on your car in several ways.
Ohio and SC are taking steps to limit payday loans and car title loans. In reality, the steps are
designed to eliminate them all together. Ohio legislation is all but done (senate and house to work out details on already approved legislation and a governor who has already promised to sign it). In SC, the bill is all but dead (died in committee).
The legislation limits the amount of interest a lender can charge (Ohio 28%, SC 25%), limit the
number of loans a borrower can get in a year (Ohio 4/year, SC 1/week), and limit the amount of the loan (Ohio - $500, SC - $600). Ohio would also prevent lenders from taking the car title as collateral and sets the duration of the loans to not less than 31 days.
While this may sound like it only limits lenders, it effectively eliminates them. "Cash America International Inc said it expects to close its Ohio lending operations" due to the new legislation according to a Reuter's news article. Also, "Washington set a 24 percent cap on interest rates last fall, payday lenders left the city in droves" according to Christian Science Monitor
Why do critics feel this is necessary? Simple. "Research shows that the payday lending business model is designed to keep borrowers in debt" according to research by the Center for Responsible Lending. "Borrowers who receive five or more loans a year account for 90 percent of the lenders’ business." These companies prey on repeat borrowers and the legislation is designed to protect citizens.
Next post shows my opinion. Feel free to comment on this part, or the previous post.