National Usury Limit Could Reduce Number Of People Paying Debt Until They Die

For about 30 years, there has been effectively no limit on the interest rates lenders can charge. This means some loans—especially payday loans, tax refund anticipation loans, overdraft protection loans, and car title loans—can have effective interest rates as high as 3,500%.

A new bill proposed by Senator Richard Durbin (D-Ill.) would cap the interest rate on consumer credit transactions at 36%. Is it time for the government to reign in the lending market? Yes, it is.

Here are what some of those ridiculously-high interest rates look like in practice:

  • A 3,500% APR on a bank overdraft protection loan means that if you overdraw your account by one cent, you will be charged $35.
  • A 400% APR on a payday loan means that if you take out a $200 loan, you will be charged about $34 for the two-week loan.
  • A 30% rate on a $1,000 credit card balance will work out to about $170 if you pay off the balance in one year (with payments of about $95/month).

We all know how we got here. Lenders made stupid loans and charged exorbitant fees to consumers who had no chance of paying them back. Many consumers defaulted; others will be servicing those debts until they die. Senator Durbin’s bill would prevent lenders from making the worst kinds of loans, and consumers from getting them.

A 36% rate would not interfere with most lending. Credit cards rarely go over 30%, the usury limit that exists in many states. It will not prevent subprime or “liar” loans. Other legislation deals with those issues.

But it will prevent the worst kind of loans: short-term, high interest loans that can be the first stroke towards drowning in unmanageable debt. In order to continue doing business, short-term lenders would have to do a real risk assessment of borrowers and charge accordingly, instead of using aggregate risk data to treat everyone to the same, extremely high interest rate.

Some loans are just too risky to allow. Now that we know irresponsible banks can put the entire country at risk, not just the bank and the consumer, it makes sense to prevent loans where the risk is too great.

Durbin proposes to reinstate usury laws [US PIRG Consumer Blog]

Sam Glover is a consumer rights lawyer, enemy of shady debt collectors, previous Consumerist contributor, and writes the Caveat Emptor blog. His column appears the first Monday of every month on Consumerist (except this time because we messed up).

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  1. jklug80 says:

    Wow you mean something good may come out the government of my home state of IL? I’m shocked!

  2. SWBLOOPERS says:

    I’ll be happy if it cuts down on the “Payday In Advance” cheque cashing places. There must be more of them per city block than street lights.

  3. fatcop says:

    While that would be nice, knowing Turbin Durbin, there has to be something more to it.

  4. rpm773 says:

    A 3,500% APR on a bank overdraft protection loan means that if you overdraw your account by one cent, you will be charged $35.

    I thought overdraft fees were just that: fees. Does it matter if I overdraft by 1 cent or 100,000 cents?

    • Chip Skylark of Space says:

      @rpm773: It didn’t use to be that way, until Mr. Reagan’s friends took over in the 1980s

    • Repique says:

      @rpm773: If I loan you $100 for a year and charge you a 10% fee instead of 10% interest for doing so… is there a difference? In practical terms, interest limits are meant to apply to “the amount you charge people to loan them money”, whatever you call that amount. Otherwise, you could always circumvent any regulations on interest just by calling the charges something else.

      • cortana says:

        @Repique: The difference. A fee is paid up front. Interest is applied to the loan balance.

        • kc2idf says:

          @cortana: A fee might also be rolled into the balance, but that’s not the point. The point is that any cap needs to cover fees also. It needs to be such that pounding the borrower into the ground doesn’t happen, regardless of what you call the charges involved.

          …and there is no difference, to the bottom line, whether you pay $X in fees or $X in interest over the life of the loan. A no-interest, one-year loan of 1¢ with a $35 fee is, indeed, 350000%. If you borrow for a shorter term (most of us address overdrafts by the next payday) then it is effectively even more. More to the point, I doubt that the bank would let you keep that negative balance for a whole year without charging additional fees — a bank I used to use charged $7 daily after five days . . . which is why they are a bank I used to use.

          • mac-phisto says:

            @kc2idf: here’s where my mind hits the wall with a big thud: banks have “courtesy overdraft fees” where they charge you for the courtesy of paying an item against insufficient funds & then they have “returned item fees” which they charge for returning an item b/c you don’t have sufficient funds. generally, at most banks they are both ~$34.

            now, according to your definition, the first “fee” is an interest charge. but is the second? i don’t see how it meets the definition – they are not charging you for borrowing the money, they are charging you a penalty for not having it.

            the reason i bring this up is b/c i don’t see how this proposed bill is entirely consumer-friendly. banks will still charge people $34 if something comes thru their account that they don’t have money for. they just won’t pay it.

            so now, if you’re $800 rent check comes in when you only have $799, it gets bounced & you incur a $34 fee from your bank & a $30 fee from your landlord, as opposed to it being paid & you being charged $34. knowing that, i’m sure most people out there would gladly have paid that 117,400% interest rate to borrow a dollar for a week.

  5. djsyndrome says:

    Low rate caps will put the payday lending sharks out of business, leading desperate people to just start defrauding their banks instead when things get tight. Not that I’m defending payday loans – far from it – but when someone is completely broke and needs to feed their kids/fat self/crack habit, common sense goes out the window.

    • bohemian says:

      @djsyndrome: No it wouldn’t. Banks would go back into the small amount short term lending market like they used to. Both our long time bank and our credit union used to do steady business in short term loans but stepped visibly out of the business when these payday loan places started showing up. Both of our banks can still write those little short term loans but they keep it hush hush and will only do so if it benefits them for some reason.

    • Repique says:

      @djsyndrome: If you need to feed your kids in an emergency, the last thing you should be doing is going to a payday loan place. There are a ton of other options available. If someone needs to feed their crack habit, they’re probably not limiting themselves to legal cash sources in the first place, but for things like food/shelter, we’ve already got a lot of programs, both public and private, to help people there. Programs that don’t take advantage of vulnerable individuals to get them into a cycle of debt that will last the rest of their lives.

  6. opsomath says:

    Would this prevent pawn shops from functioning as normal?

    • pop top says:

      @opsomath: Pawn shops don’t give out loans unless they’re a combo pawn/loan business. Pawn shops just give you cash for whatever you’re selling them. They don’t charge you fees or interest.

      • mac-phisto says:

        @squinko: hmm…most of the pawn shops around here charge “juice” if you don’t want your items resold, so it pretty much is an interest-only collateral loan*. miss your weekly/bi-weekly/monthly interest payment* & your stuff goes up for sale to whoever wants it.

        *some of the pawnbrokers don’t make you pay interest until you pick your crap up. so, if you pawn a tv today for $50, you have to buy it by next tuesday for $100 or it goes up for sale to the general public.

  7. ADismalScience says:

    That’s some interesting math you’ve got there! 3,500% sounds like an unconscionably huge number to be charging as an “interest rate,” but it’s a flat fee – the size of the overdraft is not relevant.

    Consumer advocates shouldn’t have to resort to ridiculous exaggerations to prove otherwise valid points; I feel like you weaken your argument with your first two bullets. Flat fees are not “effective APRs.” It’s much more credible to compare those values to, for example, the “average” overdraft or payday loan amount relative to the average fee. Crafting extreme examples to generate outrage is manipulative.

    I’m all for regulations in this area. But consider that artificial restrictions on popular services like payday loans will put most of them out of business given default rates. Will that stop people from taking out high-interest, short-term loans? I don’t think it will. There seems to be risk in that sector that loan sharks and other illegitimate entities will fill the void, taking an abusive – but safe – practice out of the hands of payday lenders and into the hands of criminals. I’d rather have a few people paying interest rates until they die than be responsible for subsidizing frequent kneecap replacement surgery.

    • smartmuffin says:

      @ADismalScience: Very well said. I don’t find it the least bit extreme that someone who wants a $200 payday loan is charged around $30 for the service. Lots of people apparently want and AGREE to these things. Personal responsibility anyone?

      • ADismalScience says:

        @smartmuffin:

        Well, there are behaviors you want to prevent. Payday loan rollovers, for example, are abusive and should be outlawed. But one-time liquidity requirements are fine; frequently, the fee for the loan is far less than the fee for, for example, missing a rent payment.

        • smartmuffin says:

          @ADismalScience: There are behaviors you want to discourage, but if someone really thinks it’s a great idea to continually take out and rollover payday loans, why should I care? I’m all for education about how these things are giant rip-offs, but it really bothers me when politicians living in mansions act like making these things illegal is doing a great service to the poor of the nation. As if they have any idea what it’s like to NEED $200 right now.

      • bohemian says:

        @smartmuffin: It becomes a problem when that person can’t repay the full amount on time for some reason. Then that $30 is the basis of being charged interest every week or month until it is paid in full plus the interest. So someone who can’t pay back a pay day loan is then charged that 3500% interest plus the principal until they can get it paid off. These things snowball fast. South Dakota has no usury laws so these places are on every corner in the shopping districts and the bad parts of town.

    • Ninja007 says:

      @ADismalScience: well said sir, the law of unintended consequences is your friend.

    • Repique says:

      @ADismalScience: Except that the definition of an interest charge does not require it to be a percentage. It often is, but it doesn’t have to be. Interest is a fee paid on borrowed assets, usually money. Limiting it to a certain percentage of the principal doesn’t mean that it has to be *charged* as a percentage of the principal. It doesn’t stop being interest just because you didn’t charge it as a percentage.

      • ADismalScience says:

        @Repique:

        I understand what the dictionary definition of interest is. I also understand the difference between reasoned analysis and cheap statistics. This was a case of a columnist extrapolating fee rates to generate inflated “effective APR” numbers for a lede. It undermines the credibility of the post because this tactic takes advantage of less sophisticated understandings of how this “interest rate” is being determined. Many readers would initially assume that 3,500% was not a function of arbitrary principal amounts at a glance – after all, most readers don’t get beyond the first sentence/graf.

        • Repique says:

          @ADismalScience: Oh, I don’t disagree that the 3500% thing is sensationalized, but they actually have the math wrong there… if you overdraw by a penny and are charged $35, $35/.01=3500. Which is 350,000%. Overdrawing by a dollar or so–which I admit I did several times myself when I was a dumb 18-year-old–will result in a 3,500% interest rate. But even if you overdraw by ten bucks, it’s still 350%. And it’s still an interest charge, so quite a lot of overdrafts manage to be charged astronomical interest rates, which people dismiss because they don’t see them as being interest.

  8. Sam says:

    Clearly I’m in the minority here, but 36% still seems obscenely high.

    • sburnap42 says:

      @Sam: Yeah, it should be 20%. If it is “too risky” to give someone a credit card with a rate above 20%, perhaps that person shouldn’t have a credit card.

      • Skaperen says:

        @sburnap42: I’m in agreement, here. That would be in addition to a law that freezes the interest rate on the existing balance (so if you charge no more on the card, nothing uses the new interest rate).

        Now can we address the rate of interest rate change in variable rate mortgages, too?

    • pal003 says:

      @Sam: AGREE.

      Banks, especially those getting TARP Bailout money and Fed Reserve Loans – at 0%.

      There is no excuse – especially while they owe the US Treasury and Taxpayer for their current survival – for them to charge more than 3-5%, which covers operational expenses.

      Otherwise – Nationalize the Banks – and cancel all consumer debt – that probably would’ve been a cheaper bailout anyway.

  9. Pylon83 says:

    It doesn’t seem that this bill is designed to stop “risky” loans like Payday loans, but to simply eliminate loan products that some people simply don’t agree with. Short term, high interest loans aren’t the reason the economy is in shambles, risky mortgages (which are arguably long term, relatively low interest) are. The simple fact is this is being proposed as a way to eliminate Payday lenders. But when they’re gone, what happens to the people who need those loans who can’t get a short term loan anywhere else? They are simply denied short-term credit because the one facility they could use has been eliminated because it’s no longer profitable. Theses kinds of loans are not the downfall of society, they did not cause the current downturn and they provide a valuable service to a certain segment of society. Paternalistic laws like this are unnecessary.

    • sburnap42 says:

      @Pylon83: If by “valuable service” you mean “lure people into a life of indentured servitude followed by bankruptcy”, then yes, it is a valuable service…for people who want to prey on the poor and stupid.

      • Pylon83 says:

        @sburnap42:
        They provide a valuable service by making short-term loans available to those who would otherwise not be able to get such a loan. The fact that some people abuse the loans doesn’t justify removing the option from those who occasionally use them successfully.

      • huadpe says:

        @sburnap42: So anyone with a more than 4-5% chance of default shouldn’t get credit?

        Let’s say your average credit card balance holder takes 5 years to pay it off, and at 20% APR would pay back just the principal in 3 years. In order to make the loan worthwhile, you need some profit for the bank, which is usually about 6%. So, in three years, you want less than 14% to have defaulted. Assuming an even distribution of defaults, if someone has a 5% chance of default in any given year, they should not be allowed to have a credit card. That sound fair to you?

    • Grive says:

      @Pylon83: They won’t go away.

      Oh, why, now the payday loan only charges $10 interest over two weeks. There’s a $24 fee for opening or rolling over credit, though.

  10. H3ion says:

    Almost all states have a law that prevents corporations from pleading usury. Back in the 70′s, when interest rates were above 20%, lenders would make a loan only to a corporation and have an individual provide a guaranty so as to get around the law. New York had an absolute 25% cap for everyone so the finance industry started refusing to make loans in New York. You guessed it; the usury laws were either repealed in part or exceptions provided particularly for loans by federally chartered banks.

    I think creating an artificial cap is simply going to force desperate borrowers (and a payday loan is desperation) to go underground. The loan shark industry is still alive and well. Sen. Durbin’s proposal, while well-intended, sounds like Prohibition.

    • shepd says:

      @Barrister76:

      Usury caps haven’t caused any loan sharks to go underground in Canada. Mind you, our national usury limit is 60%, so you can still get in pretty heavy, however, there are plenty of payday places out there…

      …Some of which have been busted for going over 60% with their exorbitant fees, however, even after the government cracked down on it, you can still easily get a 59.9% payday loan if you really, really, really are that stupid.

  11. TEW says:

    Virginia tried something like this and I think it has failed. They did not tackle the title loans which are a lot worse. You don’t pay they take your car. The problem is that the pay day loans and other variations are around because of the loop holes in the usury laws. That is how the rent to own business can operate. I actually feel these are more consumer friendly then some banks and all credit cards. I been in a payday loan and they have all of the fees/ interests on a big board but my bank has it in a very small print in a form that you might have thrown away. We need to help educate the consumer instead of trying to protect them.

    • mac-phisto says:

      @TEW: i agree with this. maybe create a form of CRA for payday lenders…require them to provide education/counseling to users.

      of course, you can lead a horse to water, right?

  12. rcvjr says:

    I agree with the cap on interest rates but should it be something the federal government regulates? Seems to me its a decision that should be made at the state level. I truly believe that the less federal government regulations in these areas, the better.

  13. donopolis says:

    for people who want to prey on the poor and stupid.

    I have made use of these services, I am not stupid, nor am I poor, just not particularly credit worthy…I used the money and paid my bill…Sure the interest rate was crazy high, but I knew this going in and without the loan I had no other options…and the banking fees and etc…that the bank would have charged me would have been way more than the $30 buck I spent on interest.

    Don

    • bwcbwc says:

      @donopolis: Making use of these services is not the same as falling into an endless cycle of escalating fees because you are functionally innumerate or simply don’t have the patience and skills to tackle the math that you need to figure out how to take one of these loans without falling into the trap.

  14. Trencher93 says:

    The entire US economy seems to be fueled by usury — if something like this passed, wouldn’t the economy collapse completely and go back to the dark ages?

  15. HIV 2 Elway says:

    @ bohemian: (I thought we were fixing the reply feature). No banks wouldn’t go back into these areas. Most payday loan offices are in low income areas. Low income areas don’t yeild a lot of deposits which the banks need to survive. You have your cause and effect backwards. The banks couldn’t survive in these areas and closed shop, then the payday loan folks moved in.

  16. Erwos says:

    “Some loans are just too risky to allow. Now that we know irresponsible banks can put the entire country at risk, not just the bank and the consumer, it makes sense to prevent loans where the risk is too great.”

    The whole damn reason those loans _aren’t_ too risky is because of the high interest rates being charged. Now, instead of having some high-cost money, the people hurt by this will have none.

    The quoted line pretty much sums up what I hate about the Consumerist these days – it’s gone from consumers protecting themselves to advocating for a nanny state.

    • Repique says:

      @Erwos: But are they people who really need cash more than anything else? Maybe what the average payday loan customer needs most isn’t a loan. In a lot of cases, they probably need to learn how to spend what money they already have better, not more money to spend foolishly. As long as some people keep having access to more and more cash, they just dig themselves deeper. But those same people used to turn to charitable organizations for emergencies–places that generally wouldn’t provide cash, but food or clothing or other useful things, with no strings attached, things that would be difficult to spend on lottery tickets or a new TV.

      Nobody in this country has ever starved to death for lack of a payday loan. Some folks just *aren’t* credit-worthy. There should be, and in most cases already are, myriad ways for those people to get help that doesn’t involve giving them credit. The idea that everyone *deserves* credit, no matter what the rates are, did have a lot to do with the subprime crisis.

    • bwcbwc says:

      @Erwos: I think in this case the risk is to the consumer more than the lender.

  17. Skaperen says:

    I don’t see a problem with higher rates on short term loans. The lender has to be able to make money or there won’t be any loans. A loan for a week at a 36% effective APR is going to have trouble overcoming the cost of the paperwork in small amounts.

    How about a table of rate caps based on the terms of the loans? Then if people renew or extend the loan, the extension rate is figured based on the limit from when the original amount was lent. So lenders can make money on true short term loans that actually get paid back very soon, but can’t gouge people by charging short term rates in the long term.

    Credit cards would be treated as long term loans since they are open accounts. Likewise, delinquent accounts going to debt collection would also have limits.

    And 36% is just crazy. It should be no more than 20%, if that.

    • Pylon83 says:

      @Skaperen:
      Or how about the Government not dictate the terms of a private contract that is entered into willingly by both parties?

      • donopolis says:

        @Pylon83:

        That is a remarkably good idea….the follow through on this idea would, of course, legalize gay marriage, Marriage to multiple Partners, and prostitution.

        Don

        • Pylon83 says:

          @donopolis:
          I don’t have a problem with any of those things being legal. In fact, I fully support the legalization of Gay marriage and prostitution. I honestly haven’t given much thought to polygamy, but assuming it’s truly voluntary, I don’t think it’s the governments place to say you can’t have multiple wives/husbands.

  18. dwasifar says:

    Not to be picky, but it’s “rein in,” not “reign in.” It’s an equestrian metaphor, nothing to do with royalty.

    Pet peeve, sorry.

  19. JustThatGuy3 says:

    The problem with these restrictions is that, for short-term small-dollar loans, the costs associated with processing them are substantial, even assuming the loan’s going to be repaid.

    A $10 fee to process a $200 loan doesn’t seem unreasonable (given staff time, rent, lights, etc.), but if it’s a 2 week loan, that’s a 130% rate.

  20. rugman11 says:

    Will this even do anything? Won’t banks just stop issuing Overdraft Protection “Loans” and start charging Overdraft “Fees”. Voila, there’s no interest rate, because it’s not a loan. Same thing with payday lenders. If I charge a 17% fee on a payday loan ($34 on a $200 loan) I’m making the same amount but, since there’s no interest rate, I won’t fall under this new law. This isn’t going to change any lending practices, just the terminology.

  21. EdenBabararacucudada says:

    okay, $35 for one cent is extreme, I’ll give you that one.

    But having to pay $34 to be handed $200 for two weeks is really not a problem, in my book.

    And yeah, I’m upset that when I moved to the U.K., my perfect U.S. credit rating was ignored, and apparently the NORMAL rate for credit cards is around 30%, but isn’t it all the the 0.04% interest rates, no questions asked, which got the U.S. in so much financial trouble to begin with? I pay off my credit card every month I use it anyway, so 0.04% is the same to me as 30%, but I can certainly see why it’s worth actually discouraging people from getting into debt.

  22. djsyndrome says:

    “Banks would go back into the small amount short term lending market like they used to.”

    Banks aren’t handing out loans to people more than qualified. What makes you think they are suddenly going to start giving low-profit short-term loans to people with no other avenues of credit?

  23. Blueskylaw says:

    The new Durbin Payday Loan Lending Center will be set to open soon as every one else has been driven out of business.

    Seriously though, there is too much money to be made here. Loopholes WILL be found and business will go on as usual.

  24. Daveinva says:

    “Some loans are just too risky to allow. Now that we know irresponsible banks can put the entire country at risk, not just the bank and the consumer, it makes sense to prevent loans where the risk is too great.”

    As has been said already, payday loans have NOTHING to do with the banking crisis.

    Americans are debt-strapped, but the debt-strapping that got us into trouble was tied to the mortgage market, not payday loans.

    Even credit card debt– as bad as it is– isn’t what put us here. And even if credit card debt *was* responsible, it’s not affected at all by Durbin’s bill, or any reform promoted in this posting.

    I won’t defend payday loans as a general practice, but they have their place. Want to make legal changes to regulate the market better, prevent the most abusive penalties (like car title loans)? Fine by me.

    But banning them outright?

    Honestly, this posting is far beneath the standard of excellence I’m used to here at Consumerist.

  25. curthibbs says:

    @undefined: When I was in my youth, the limit was 18%. Everyone, including the credit card companies seemed to be doing just fine with that. What’s wrong with just going back to what it used to be?

  26. TWSS says:

    Didn’t they pass this law, only applying to active duty military personnel, a few years ago? IIRC, it was the same rate cap, too. I wonder who stepped in to fill the gap – I know USAA doesn’t provide loan terms shorter than, like, a year.

  27. chilled says:

    These are the banks of last resort for a large portion of the population…no one else will lend money to high risk individuals.Interest rates reflect the risk of default,which is high.

  28. Sam Glover says:

    @Repique:

    Thanks for checking my math. I knew I would get something wrong in there.

    @ADismalScience:

    Interest charges and fees both represent the cost of a loan. Regulating one, but not the other would be pointless.

    As for sensationalizing, I merely illustrated in real terms the numbers present in the bill itself.

  29. Michael Knoll says:

    I hate banks and fees as much as the next guy but I really can’t understand what this is supposed to accomplish.

    Taking these one at a time:
    A 3,500% APR on a bank overdraft protection loan means that if you overdraw your account by one cent, you will be charged $35.

    So don’t overdraw your account. If you do plan on overdrawing your account buy the damn overdraft protection. I have free overdraft protection form my credit union. Up to 6 times per month they will transfer $$ from my savings to my checking to cover an overdraft. Some will cry that they don’t have savings; if so balance your book and don’t spend the money you don’t have from your debit card. Do without or get a credit card. If you grew up to be old enough to have a job and a checking acct you are old enough to handle this.

    A 400% APR on a payday loan means that if you take out a $200 loan, you will be charged about $34 for the two-week loan.

    These loans are backed by nothing but the word of someone who does not even have $200. Would you lend a friend this money week after week for “only” $34? I wouldn’t. Plus, there is a very real cost of paperwork for this transaction that has to be captured in a very short time. In almost every way this is not interest but a fee. I bet that if you pay it back sooner you don’t get any money back from your fee. The fact is that getting a payday loan even at this price is often the lowest cost alternative for someone who is jammed up financially and eliminating these will only hurt those people not help them.

    A 30% rate on a $1,000 credit card balance will work out to about $170 if you pay off the balance in one year (with payments of about $95/month).

    This is a credit card, it is expensive. Don’t like it? Pay in cash. I don’t even see how this would be affected by this law since the rate is under 30%. If it is being done as a comparison then it is not a legit one because if pay day loaners had access to credit cards they would not be getting payday loans. Plus the costs of a $1,000 cash advance are very different from those for a 1,000 purchase.

  30. Anonymous says:

    No one is holding a gun to anyone’s head to MAKE them take a payday loan – but the banks aren’t lending small amounts for short periods of time. So Durban just wants to screw the people with poor credit to whom no bank will lend ANY money. These are people who need a quick loan, usually pay it all back, are aware of the fees (not interest rate – FEES) going in and are will to pay them. Where else are these people going to get those loans from?? What is it with Congress and their “we just look at what’s in front of us and damn any Unintended Consequences (and the people who get hurt)” attitude.

  31. kwsventures says:

    I like those high fees and high credit card interest rates. You would think that you make people stop using credit cards. How much pain can you take? Our country has a terrible credit card debt fever that needs to be broken. High credit card costs should do the trick.

  32. SillyinPhilly says:

    This will be the end of the State of Delaware. South Dakota must be nervous as well.

  33. bearymore says:

    36%??? Before the late 1970′s the limit was 18%. Above that, you were guilty of the crime of usury. They rescinded the limit because inflation was running 13 and 14 percent. Now that inflation is down to the level it was before the stagflation era, the 18% limit should be reinstated.

    It would be nice if the American people had a historical memory of more than 20 minutes.

  34. nacoran says:

    There is a difference between the effective interest rate of a loan and the actual interest rate. A lot of these loans have a built in fee to cover the cost of processing it. If you don’t let the lender charge that fee you may kill the market. Payday loans may be usury but if that’s the only way you can pay your rent killing the market may cause more harm than good. That being said, the micro-loan industry is thriving and growing in the third world. A high fee is different than a high interest rate though. Now, late fees are much more dangerous and closer in effect to high interest rates; they can make the total cost of the loan explode once you get behind.

    As for the high charges for overdraft, think about it this way: it’s not a credit card. Basically, banks don’t want you writing checks or making charges you can’t cover. They are suddenly stuck with two choices- cover the charge and lend you money on the fly (and you’ve just given them some evidence you are having financial troubles) or bounce the charge. If they bounce the charge two things happen. You get a lot of bounced check fees and a bad reputation at the local stores and people start to question whether they should take checks/charges from that bank. The overdraft insurance should act like a penalty. If you aren’t good at balancing your account because you aren’t good at math, you should keep some extra cash in there. If you aren’t good at balancing your account because you are in financial trouble and you are still charging things, you are spending money that isn’t yours. The banks should charge you a lot for that (moral hazard and all that). By paying the bill for you they are protecting you from charges of the criminal sort. Of course, if they wanted to prove they were doing it for the right reasons they could pledge to give the overdraft fee to charity. It would keep a penalty in place for people who aren’t being financially responsible but make it so the bank isn’t making money off of you being financially irresponsible. It’s a common bank practice to process the biggest charge first so that if your going to bounce anything you will run out of money early and more charges will bounce and they can charge more fees. A bank that didn’t get to keep all those fees might help you out by offering a service to process fees by some other standard. Wouldn’t you love a bank that made sure your electric bill and rent checks cleared before they processed that charge you made on Amazon? Or maybe let you decide which one to process first? Or just called you to let you know there was a problem before they started charging fees? It’s the same problem you’d have if you gave a policing agency the authority to charge you a fine and then let that agency or someone who sets that agencies budget keep the money from the fines. Banks are speedtraps!

  35. ageshin says:

    Sen. Durbin’s bill is a start in the right direction, but it does not go far enough. Something like fifteen per sent would be more like it. As I see it we must reduce the insentive for banks to issue these cards. If they were forced to take a small profit they would not be so eager to hand them out to anyone who can take a breath and sign on the dotted line.

  36. chrisjames says:

    Before we stir up the nest on either side of the issue, can we rethink the idea that APR is a reasonable measure of usury rates? Not all loans even reach a year in age. Credit cards, for one, are a poor example, as the APR is rarely ever applied directly to your balance; it’s not often you’ll freeze the card and pay it off steadily for over a year. Neither are all loans structured the same, and often payment structure, not interest, is what hurts people.

    I’ll trot this back out for the argument:

    The payday lending fiasco is making a mountain out of a molehill–well, at least one molehill, the other issues may actually be mountains. The calculated APR is, in fact, reasonable. because the loan is never meant to age beyond a few weeks (in The Consumerist’s example, likely two weeks). The APR comes out to about %400, but the interest collected is only %15. That’s less than half what a dealer 5 year car loan will get from you, probably far less than a bank will rake in from a credit card user, I won’t go into ARMs, and about average across the industry for all good loans (mortgage, auto, school, and maybe business and some short term loans).

    In my opinion, usury needs tighter restrictions, but it also needs a redefinition too.

  37. William James Gibson says:

    Payday loans gone, short term lending gone, the cycle of buy now and pay later gone. Wow, wouldn’t we be better off? But wouldn’t we be better off if schools could focus on the skill sets needed to succeed (or just survive) in life and not on passing some fracking test. It’s not about common sense. When so many people are in the same situation, something is missing. Real education and learning to save and then buy something. Ban the ads telling people to use credit cards. Ban the sending of credit cards to everyone old enough to have one. Cap the interest rate at 15% and see how many of those mailers are sent.

  38. Anonymous says:

    Really? Now the argument is that people in need of emergency money have no common sense? The cases for and against payday lenders are getting more and more outlandish. Supporters and users of these products have been called incompetent, uneducated, incapacitated and now there’s a “fear” that they will resort to fraud out of desperation? Give me a break! The average payday loan consumer probably has more sense and more education than the average “blogger.” The FACTS are that nearly 100% of short-term loan users have a high school education and over 50% of them have some college education. In addition, stating that there are no interest limits on payday loan rates is a grossly incorrect and negligent statement. All states have regulatory guidelines on payday loans as well as rollover maximums and interest rate caps. Furthermore, a $200, two week payday loan is in no way equivalent to “paying debt until they die.” Falsifications only perpetuate and encourage ignorance. With respect, my assumption would be that you “prey” on individuals who don’t have the capacity to do the research themselves.

  39. TruthAboutPDL says:

    Studies by The New York Federal Reserve and Dartmouth College unequivocally demonstrate that a 36% rate cap – which is a de facto ban – harms consumers. Instead, they have to bounce checks to obtain that credit, at a cost of $60-90 per check.

    Other than that, the only place to get short term credit is Mr. Glover’s doorstep.

    I wonder how much he’d charge for an unsecured loan?

    In other words, if the Consumerist is going to let “experts” post about certain topics, they owe it to their readers to make certain their columnist knows of what they speak.

    Outrageous!

  40. TruthAboutPDL says:

    Glover’s post demonstrates the ignorance of those who have never had the need for short-term credit. And he should be ashamed and embarrassed by his elitist, nonsensical stance on credit in general.

    His first sentence should give readers a clue how clueless Mr. Glover is. “For about 30 years, there has been effectively no limit on the interest rates lenders can charge.” False. Almost every state has a general usury law; commercial lending usury law; and legislation capping the fees payday lenders may charge.

    He also perpetuates the long-debunked myth that short-term loans – payday loans, tax refund anticipation loans, auto title loans – should be compared on an APR basis to more traditional long-term credit such as mortgages. As numerous studies have pointed out, including one by Dr. Thomas Lehmann of Claremont-McKenna college, payday loans are two-week loans, not year-long. Furthermore, the consumer doesn’t give a hoot about APR’s. They just want to know how much in real dollar terms their credit will cost. And, GASP, 6 million Americans CHOOSE to use that credit.

  41. TruthAboutPDL says:

    Glover claims, “A 36% rate would not interfere with most lending.” WRONG. The average default rate on payday loans is 6% and average monthly overhead for a PDL store is $8000. With those numbers it is IMPOSSIBLE for payday lenders to stay in business without charging at least $15 per hundred borrowed.

    “Some loans are just too risky to allow,” he claims. Not payday loans. They’ve been around for twenty years and over 6 million Americans willingly choose to use them every year. Why are 25,000 stores available to serve customers? Because there is a need for short-term credit. The price of credit is RELATIVE TO RISK. My God, that’s the FIRST lesson of Debt 101!

    Consumers can take care of themselves.