Arizona Becomes 16th State To Punch Payday Lenders In The Face

Arizona is about to say goodbye to predatory payday lenders who issue loans with annual interests exceeding 460%. On Thursday a decade-old law will expire, capping interest rates at 36%. The predatory lenders begged to keep the law in force, but voters and the legislature just sat back and gave the industry a big, slow, deserved punch right in the face.

Arizona Attorney General Terry Goddard has pledged to go after payday lenders who do not abide by the new interest-rate cap.

“They are terrible loans,” said Susan Lupton, a senior policy associate for the Center for Responsible Lending, a non-profit research and policy organization. “They are absolutely awful. There has not been a new state that has authorized payday lending in years, and states are continually looking at ways to cut down shops or get rid of payday lenders altogether.”

The few payday lenders that survive are expected to switch to auto-title loans, where borrowers use their cars as collateral for loans with interest rates exceeding 200%. Thankfully, many of the borrowers the industry targets don’t own cars.

Payday lenders calling it quits [The Arizona Republic]

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  1. smo0 says:

    It’s only a matter of time before these places are gone, I count the days, lovingly.

    On a side note: The few payday lenders that survive are expected to switch to auto-title loans, where borrowers use their cars as collateral for loans with interest rates exceeding 200%.

    How desperate do you have to be?

    I mean i got trapped in loans to pay rent but they were mostly small amounts. Putting up a car is insane…

  2. ARP says:

    I’m glad they’re leaving but I wonder if there’s a way around the interest rate?

    Is there a cap on fees? Couldn’t these places just charge a large upfront origination, application, etc. fee and simply add it to the overall amount paid off? C’mon guys, you need to start thinking more like big banks.

    • El_Red says:

      ”Fees” is exactly the loophole used by payday lenders in Canada. Law caps interest rates at 60%. But there are a lot of different ”imaginary” admin fees. So real interest is sometimes in 300%-600%

      • Tim says:

        I think most U.S. laws (which are handled at the state level, because states’ rights, Civil War, it’s the ‘Merkin way, woohoo) just consider fees to be interest.

    • MitchV says:

      They already *do* think like big banks. Big banks *have* been involved with this kind of lending… search Google.

  3. dreamfish says:

    I’m just waiting for some commenter to state that capping extortionate interest rates is a threat to capitalism and the free market system.

    • ARP says:

      It is. But I’m not much of a free market capitalist, so I’m glad they’re going.

    • smo0 says:

      There’s always one.

      And in this case – usually 5 or 6.

      But look at the numbers.

      460% vs 36% – they are making a f**kload of money either way.

      • Powerlurker says:

        They’re not making as much money as you think; net margins are about the same as normal banks. When loans are for very short terms, small amounts, and primarily to a population that has shown it can’t be trusted with lower cost forms of credit, you need to charge more to keep your lights on. A 36% APR on a $100 loan to be paid back in one week would mean you’d earn less than a dollar on that loan. You couldn’t even cover the cost of the employee that issued the loan on those rates much less rent, utilities, and other overhead. The business is incredibly competitive. That having been said, I still think they should be shut down.

      • Mr. Mangold says:

        Along with taking a f**kload of risk. Woops, I used common sense. I guess I’m an evil capitalist.

        • TouchMyMonkey says:

          Not really. They’re just soaking the poor and the ignorant. For one thing, you usually need a JOB to get one. If you have one of those, the collection agency goons can make your life hell. These people are scumbags, and they need to be shut down.

          • Mr. Mangold says:

            Not really? They aren’t taking on a ton of risk loaning money to people who don’t even have a checking account?? Have you seen the default rates? Do you even know what a default rate is?

    • Griking says:

      Didn’t you just say that for us?

  4. petermv says:

    Interesting that the lawmakers in AZ care about this issue judging by the “papers please” law recently enacted by these self same legislators.

    Then again, it could be part of a master plan to make sure those “dang fereners” can’t get a loan either.

    Too paranod or conspiritorical?

    Maybe, maybe not.

    • mythago says:

      Not.

    • bikerider008 says:

      No, you are just stupid

    • ARP says:

      We’re wearing matching tin-foil hats. I think this is a win-win for AZ. They can look populist to the indies and liberals and continue their anti-immigrant show for the conservatives.

      Politically, it’s pretty brilliant.

    • Benjamin Stearns says:

      As someone living in a border state, I’m offended by your comment. Read the Arizona anti-illegal immigration law before you start saying things like that. I trust that you have not read the law. I also don’t appreciate your making it seem that we’re all ignorant hicks. The bottom line is that illegal aliens (of any nationality) are a burden on this country. It is the federal government’s duty to protect and defend the borders. Obama has shirked on that responsibility. Arizona has simply passed a law requiring that their law enforcement officers must now check the immigration status of anyone that they suspect to be in this country illegally. The law specifically prohibits profiling.

      In your diatribe against Arizona, you must have forgotten that pay day lenders, require that the borrowers have the same information as other lenders would ask for. In addition to that, they require that the borrower have a bank account. Illegals don’t tend to have a bank account.

      • TouchMyMonkey says:

        Obama has shirked this responsibility? Really? You mean there was no illegal immigration problem during the Bush administration? Are you serious?

        The problem is, there aren’t enough agents to police the southern border. Now, you can hire more agents, or send in the National Guard, whatever, but that costs money. Pop quiz for you – can President Obama just print this money and get this done? Answer: No. He has to ask Congress for funding. Now, what do you think would happen if the House of Representatives passes a ginormous immigration bill with lots of new funding for whole armies of ICE agents, materiel, the works? Well, it goes to the Senate where there are 41 complete idiots sitting there ready to stop the whole thing for no better reason than because they can. It doesn’t even matter if the bill is something from the previous administration that was dusted off and sent through as is. They’ll kill it because this particular President wants it.

        So go peddle your “Obama isn’t doing his job” bullcrap someplace else.

        • Gandalf the Grey says:

          Mr. Obama managed to get the money printed for TARP and Health care, so if he really wanted to, yes I do think he could print the money for this.

          Mr. Bush failed miserably with this issue as well, as well as Mr. Clinton.

          The Arizona law also specifically states that the police inquire about the immigration status of any person who they already have detained for some other reason. This is the same action that federal law states these agencies should preform.

          I don’t give a s*** where you’re from. I immigrated to this country legally, you can too.

          • TouchMyMonkey says:

            Getting money printed != printing money. Besides, which President asked Congress to authorize the money printing for TARP? What was the state of the TARP program on 1/20/09? Which one took actual control of the program and made sure the taxpayers didn’t get ripped off? And for extra credit, does the HCR law (1) increase or (2) decrease the deficit?

            In all of these cases, Congress, specifically the House of Representatives, is the government entity that exercises control over the federal budget. It works like this. The President writes a budget and submits it to Congress. Congress takes the budget, throws it into the circular file, and writes their own budget, which they pass and send back to the President, who then whines and complains about the contents just before signing it into law. The President might write the checks, but not without authorization from Congress. It’s in the Constitution. Read it. Learn it. Live it.

            • Gandalf the Grey says:

              When you ask about the HCR law, and weather it increases the deficit or decreases the deficit, please clarify as to if you want a very narrow view that looks at the law on it’s own, or the view of the HCR law with the ‘fixes’ tacked on after the end.

              I moved from a country with social medicine, I’ve seen what a flaming mess it is.

              I apologize. I confused TARP and the American Recovery and Reinvestment Act of 2009. Please substitute TARP for ARRA 2009 in the statement above.

              The whole realm of politics over here is almost worse than the Thatcherites vs the Labour. People get so much more worked up about it though.

      • petermv says:

        Yes, as a matter of fact, I have read the legislation, and by your comments it appears that you have not. Considering that allowing the local police force to request citizenship information and to allow them to lock you up if you cannot/will not provide same, is rather chilling and reminiscent of totalitarian regimes.

        As to thinking that all Arizonians are hicks, no I don’t. I lived there for 10 years in Phoenix. However I do think the red menace” of illegal immigrants is far outstated and a great political band wagon to hitch up to when you are of the neo-con persuasion.

        You do have one thing right in your comment though, it is the federal governments duty to protect the borders, which is a power allocated to it by the Constitution of the United States, and not something that can be usurped by a state government. Which is one of the reasons it will be repealed, or at least should be.

  5. smo0 says:

    Just a note on that picture.

    This is personal experience.

    If they require a credit check – if you default, they’ll report you and go through the usual hard-ass collection agencies or their own departments to get that money back.
    If they DON’T require a credit check – and you default, they will straight up garnish your wages.

    Not to balance out the lesser of the two evils, but the one that requires more “security” in regards to giving you a payday loan is going to be your best bet for the least amount of shenanigans. And before I get flamed with the “pay your bills” comments – mind you, always think about the “what if” scenarios… if you must go this route, you can use it as a deciding factor.

    • Tim says:

      Which one requires more security? I hope you mean the ones that require a credit check and work within the credit reporting system.

      If so, I agree with you. Think about it: payday lenders always say that they have to charge a million percent interest, because their business is so expensive to operate. Well, it’s probably that expensive because you don’t use the traditional credit system. Most importantly, you have no way to tell if someone will pay or not, so you can’t adjust your business to suit the risks you’re taking on.

      • aaron8301 says:

        Yes, because the credit reporting industry is so secure, honest, and ethical. That’s why each time I check my credit from the big three, each report shows something not on the other two, and lack something that is on the other two. They’re just SOOO accurate.

        • Tim says:

          On average, they’re more accurate than literally having nothing to judge someone’s creditworthiness. And if one is inaccurate, there are laws dictating how you can have it corrected. You can’t really have “nothing” corrected.

  6. andyparkerson says:

    Payday lenders exist because their services are demanded. They lend to people with poor credit who are otherwise unable to borrow money. Capping the interest rates simply means that those with the worse credit will not be able to borrow money.

    Not everyone who borrows money from these places is stupid or wasteful. Plenty of people need some extra money from time to time, and use it to feed their families or pay their rent. Capping the interest rates will make the lenders less profitable, which means they will stop lending. Families will go hungry and rent will go unpaid.

    On the other hand, some people who abuse the lenders and fail to repay their debts will be slightly better off. Is it worth it? I don’t think so, but apparently many do.

    • Kitamura says:

      While I don’t deny there are always outliers where they actually need money, the number of people who genuinely need a loan at 460+% to survive, and can actually afford to pay it back are probably absurdly low.

    • mythago says:

      If a lender can’t figure out how to make a profit at 36% interest, perhaps they shouldn’t be in the business of lending money.

      If you’re truly and primarily concerned about all those people who can’t get loans, then perhaps we should abolish laws permitting a credit check and just require lenders to hand out money to everyone; after all, aren’t there desperate people who need the money?

      • Powerlurker says:

        And similarly, if a person is such a bad credit risk that they can’t be lent money profitably without charging them an interest rate significantly greater than 36%, it may be that they should just be forced to do without credit.

    • Powerlurker says:

      No, they’ll still be able to get credit. They’ll just have to go a rung or two down on the credit ladder and head to their local pawnshop or title lender instead of their local payday lender.

    • Tim says:

      First of all, you’re basically saying that borrowing money you don’t have is a right. You’re saying that if someone wants instant money on a short-term basis with no credit check, s/he should be entitled to it. How do you figure that?

      Secondly, you’re saying that the demand that’s there is completely independent of the supply. In somewhat economic terms, you say that the demand will always be there, whether the supply is high, low, whatever. So does that mean that there was demand for payday loans before the business existed?

      Think about the supply side of things. Payday lenders have, for decades, been telling people that they need to borrow money they don’t have. In a bind? Need to pay a bill? You need to borrow money right now! Then people see that and realize that that’s, ostensibly, a way to get out of their shitty situations.

    • dantsea says:

      “Capping the interest rates simply means that those with the worse credit will not be able to borrow money.”

      It’s a real shame that people who’ve demonstrated an inability to pay back loans won’t be able to get more of them.

      • DorsalRootGanglion says:

        It’s a real shame that you can wreck your credit when things beyond your control force you to lose tons of money, like extended unemployment, catastrophic illness, or natural disaster.

        • dantsea says:

          Oh, well, when you put it that way, what possible risk could there be in loaning a person in such situation more money they can’t repay?

    • TouchMyMonkey says:

      Crack cocaine/meth/heroin/child porn exists because there is demand for it.

      See how that can be twisted around? It’s that easy. Demand for something does not grant it the right to exist.

  7. Nick says:

    As an Arizonan, I can say that I’m happy this finally happened. However, for a long time, the republicans here were strongly in favor of keeping payday loan stores alive (free market, etc). Unfortunately, I’m guessing their recent change of heart was at least somewhat related to the realization that illegal immigrants are frequent customers of AZ’s payday loan stores.

    • tbax929 says:

      As a fellow Arizonan, I share in your glee. It’s nice to see a law pass around here that I actually support (although I also supported the sales tax increase).

  8. yankinwaoz says:

    I was in AZ when the industry was trying to trick the voters into extending the law. The strategy they deployed was to run ads attacking their own industry as predatory, and then offering the proposition as the solution. Fortunately, the voters saw through the BS. It must have been insulting to the citizens of AZ to be treated as idiots.

    Seriously: A person who has to take about a 460% loan from shady characters such as this really doesn’t need, or deserve, the loan. AZ outlaws prostitution and narcotics in order to protect citizens from their own unwise decisions. So protecting them from predatory lenders is no leap of government restricting the lives of citizens.

  9. dg says:

    The reason the interest rates are so high is because the people borrowing money from these kinds of places have ZERO credit, and tend to have crappy jobs. So they’re borrowing against the future receipt of a paycheck to pay off the loan. It doesn’t take a genius to figure out that this is a risky loan proposition – so they set the interest rates accordingly – then the ones who default are covered by the ones that didn’t (and there’s not many of them).

    In Illinois, there’s very specific rules as to how many times a loan can be “rolled over” (generally it’s a 2 week loan), fees, etc. Also, they only loaned you a percentage of what your paycheck was – that helped to even out the risk.

    Don’t pay and you’re not getting reported to a credit agency, you’re getting your wages garnished because the lender:

    a) knows where you work and how much you make

    b) wants their money back

    As for title loans – they’re another risky proposition. The cars being loaned against are generally pieces of crap (and that’s being kind), and the loans are limited to 1/3 of the “Rough, Black Book Value” – that being, the price a dealer would pay at auction if the car were a total shitbox. Say it’s $1000.00. They’d loan you a max of $333.33. Then if they do have to repo your vehicle, they know they’re getting their money back + transport + title fees.

    You go in there, bring the title, give it to them, fill out some paperwork, show a DL, get your cash. When you come back with cash + interest – you get your title back. Don’t pay? Car gets repo’ed, and sold at auction within a few days.

    I know all about these businesses – back in the day, I helped to close out a store that had an embezzler working as the manager – audited the books, repoed vehicles, collected on loans, etc… The vast majority of people coming in aren’t going to get a loan anywhere else – some know they’re getting ripped off, but accept it because they know they’re not going to get it elsewhere…

    • Tim says:

      As for the payday loan part: yes, exactly. Usually, higher-risk borrowers pay more, because chances are pretty good they’ll cost the lender more money (their chances of not paying are higher, and not paying = a cost for the lender). But if you don’t do credit checks, you treat everyone the same, regardless of risk, and you have to spread that risk among all of your borrowers, risky or not.

      • dg says:

        Yeah, but what would a credit check gain you as a business? The credit reports run between $12 and $40 depending on what level of info you want. And chances are you’re going to look at the report and deny the person – or if you didn’t deny, then you’d charge more.

        Why not just save the cost of the report and charge everyone who walks thru the door the same high APR?

  10. Dr.Wang says:

    In Arizona, the payday loan stores will be replaced by fireworks dealers every summer.

  11. balthisar says:

    Doesn’t affect me, and it only affects stupid people. Why shouldn’t stupid people be able to screw themselves further? I know, I look like a jerk, but what’s it to you? How do these businesses affect YOU, unless you’re stupid and have been “victimized” yourself? Where does “victimization” end? Does that government have to step in and call 6% mortgages “usury”?

  12. Abradax says:

    That is already how they operate. The APR they quote isn’t interest, it is the fees associated with the loan in addition to the interest.

  13. EcPercy says:

    Good for Arizona! The payday loan scheme gets you trapped in a vicious cycle. I haven’t had to use these services, but I have had someone try and borrow money from me so that they can keep this thing going..

    It was something like just loan me $xxx.xx and when payday comes I can borrow more money from the payday loan place to pay you back… I don’t loan out money so I just gave this person the money to get out of the payday loan scam.

    I can’t wait to see these places crumble. They are an unneeded burden on an already troubled economy.

  14. Bob Lu says:

    Wut? I though most of those who are living check to check own at least a truck and a 40″+ HDTV?

  15. brinks says:

    There are a lot of payday loan comments here with negative comments about who those places target.

    I’m college-educated and, at one point, had a job that paid me very well. It paid enough that, after my boyfriend got laid off and was ineligible for unemployment, I could still easily support both of us. However, his car needed $1500 in repairs and there was literally NO other way to pay for it other than a payday loan. I didn’t have a car he could use (I walked to work and didn’t need one), and he couldn’t to get to most of his interviews on the bus (public transportation here sucks). We are renters, so we had no collateral for a regular loan, and I didn’t have enough on my credit cards. No one in either of our families is faring well in the recession (I was, in fact, the best off), so we had no one to borrow from.

    Some people misuse these loans as a constant source of income. However, there are those of us that are responsible and educated that, through no fault of our own, get into situations where we NEED something like this. Ohio banned payday loans with those ridiculous interest rates, but they still exist in other forms at those places, just with a new name and lower rates. Payday loans got us our of a really hard time.

    • brinks says:

      *OUT* of a really hard time.

      I’m glad the government is cracking down on predatory lending, but I appreciate the opportunity to still be able to get some sort of loan when I’m in dire need.

    • dantsea says:

      There are exceptions to every rule, or stereotype. Go you.

    • Michaela says:

      It’s those crazy, unexpected events that made my parents encourage me to save since I was a little kid. I have (and will always have) a percent of my income tucked away to use only when I am faced with crisis. However, I know the creation of an emergency fund isn’t possible for everyone, and that I may find myself in a situation where my funds aren’t enough, which is why I am so excited that more and more states are starting to increase regulation on payday loans. I still don’t think I will ever use them (I have to many options before them), but I still want them fair and properly regulated incase I hace to do so.

  16. TandJ says:

    Thank God that the government is going to protect all of us from some of us.

    Although I have never borrowed from one of these locations, I can only assume that risk and reward go hand in hand. The people that borrow at these rates are beyond help except from the charity of others. If they are able to make the payment; they are being responsible. If they do not, it evidences the need for the risk taken.

    Will the Mafia get a boost in illegal loan sharking by the ban on legal and regulated high-risk lending? Probably. Will broken legs become the norm in some neighborhoods until people realize that it is better to pay up rather than to ignore their debt? Probably. Will people ever be protected from themselves? Never.

    Will interest rate controls prevent companies from finding news ways to profit and pay taxes? Probably not. Unless we move more to socialism where our favorite Uncle will provide for all of us – some more equally than others.

    • dantsea says:

      “Will the Mafia get a boost in illegal loan sharking by the ban on legal and regulated high-risk lending?”

      You do realize that most of these check-cashing places are basically a corporate veil for “respectable businessmen,” right?

  17. gman863 says:

    My guess is “payday lending” in Arizona will now be run by guys named Guido and Vinnie.

    Uninsured medical costs in the state will skyrocket due to a sudden increase in broken kneecaps.

  18. Futureman says:

    Payday loans charge high rates because they are dealing with people with poor credit. Dramatically lowering the interest rate by fiat will decrease the types of loans offered to people with poor credit by these companies. So where will these people turn? They either won’t be able to fix their car, buy food, pay the electric bill, etc. or turn to loan sharks. I doubt they’ll follow the loan sharks will follow this new law.

  19. zero says:

    Well they did something right, cheers!

  20. thisistobehelpful says:

    Is this to make up for the “we hate Mexicans” law?

  21. Dallas_shopper says:

    I’m so sick of seeing those car title loan ads on TV, I could puke. It’s so predatory.

  22. scurvycapn says:

    I remember when this went down in Ohio a few years ago. The voters voted to cap the rates to low amounts. Then the check cashing folks went on a bender to get another issue up to vote the next year to reverse the changes. They were going around getting people to sign petitions by lying and saying that it was to keep the changes as they were instead of reversing them. Even elected officials said they were approached with the scheme.

    I also don’t understand the whole check cashing thing. Most of these places will also cash your checks for a few bucks. I guess people are just scared of banks even though their money would be FDIC insured. Well, actually, these folks would probably be getting hit with overdraft fees up the yin yang, seeing how they are managing their money to begin with.

  23. psanf says:

    This is really good. Now we need to get the government to start pushing banks to do more small loans. This could generate positive income for the banks and help Americans use credit responsibly again, IMO.

    http://consumerist.com/2010/06/fdic-pilot-program.html

  24. areaman says:

    The payday lenders should have hired more expensive lobbyists. If they had, they could have bought and paid for a longer ‘trial period’ or have a law that is not set to expire. They really have no one to blame but themselves. The government did exactly what they were told to do at that time.

    Also, if this law makes it so one person who uses these loans often has a (an?) honest dialog with themselves and/or the person they owe money to (landlord, utility company (pay or you may die), etc), I’m going to say it was all worth it.

  25. peebozi says:

    the market will work itself out on this one. if you don’t believe me you should answer this one question: Why do you hate america?

  26. shonblatt says:

    I fail to understand the controversy here.

    The lender is dealing with a much higher-risk client. The loans themselves are for smaller amounts and are extremely short term by design, so the lender isn’t making any money without fees and a higher base interest rate.

    So I borrow $500 for two weeks. The cost for that is around $50 in fees/interest – how exactly is that predatory? Annualizing a rate for this loan makes no sense, because the term of the loan is 1/26 of a year.

    I need the money, and a bank certainly isn’t going to loan me that little for such a short term. Is it a better alternative to let my power get shut off or my kids starve?

    • FrugalFreak says:

      How dare people of lower income try to live like the middle class. It’s an abomination. If they live like the Upper Middle, then that fades the image the upper middle hold of themselves.

      Which is folly anyways.

  27. FrugalFreak says:

    The beginning and reinvestment of loan sharking. Much better option for “those” poor people who refuse to succumb to the all powerful Credit Industry. The poor can’t borrow money anymore so some will have to resort to stealing possesions or borrowing money illegally to get some money. Great call Arizona,. make sure to give Banks & CC industry a dutch oven tonight.

  28. belingrif says:

    I work for a pay day lender and I think it is very sad that the people of Arizona are having their short term credit options limited even more. We charge $15 to borrow $100. A bank will charge you a $35 nsf fee on a $2 returned check. What is the apr on that? The folks that walk through my door come to us because it makes the most sense for them at that time. They are smart enough to weigh their options and make a decision that best fits their financial needs.
    In addition, how many people is this bill adding to the unemployment line?
    Especially in times of economic downturn, such as now, I think we should be giving consumers more credit options, not less. Many subprime consumers are finding that they have fewer and fewer choices when in need of immediate credit. While payday loans may not be a long-term solution to their problems, they can help many hardworking people make it through difficult short-term periods or cover emergency expenses that they never saw coming.

  29. Daniel says:

    As for me, I think that eliminating of Arizona payday loans won’t solve the problem. Besides, this may even cause additional problems. Let’s imagine that payday lenders will close their store. Then, what should people working there do. They will become unemployed. Is it better than payday loans. I don’t think so. People willing to get some extra cash will definitely find the way to do this. Besides, no one makes them to apply for these payday loans. They do so on their own will. Then, what is the lenders’ fault? The government can regulate them, but I don’t think that eliminating is the best way out.