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

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.

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

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?

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.

Would this prevent pawn shops from functioning as normal?

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.

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

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

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.

@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?

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.

@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.

@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.

@SteverMan: Warren G Harding and the Teapot Dome scandal is my personal political bogeyman on such matters.

@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.

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.

@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.

@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.

@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.

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.

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

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

@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?

@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.

@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.

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?

@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.

@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?

@ 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.

"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.

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.

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.

@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.

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.

@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.

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

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.

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.

@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.

@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.

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

"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?

@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.

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.

@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.

@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.

"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.