Payday loans hurt those who can least afford to pay them

The .average interest rate on a credit card loan in the United States is about 17% per year. With housing loans in the 6-7% range, that’s not exactly cheap. It is cheap, however, when you compare it to the exorbitant rates charged by the payday loan industry. Payday loan stores, also known as cash advance loan stores, which are popping up in neighborhoods across the United States, specialize in small, short-term loans. Most such loans are issued for amounts that vary from $100-500, and the typical duration of the loan is two weeks. The interest rates charged on these loans, which vary from $15-25 per $100 borrowed, can amount to more than 500% per year when considered on an annual basis.

The proliferation of these businesses has led to thousands of victims who find themselves in a never-ending cycle of being unable to repay the loans. If you cannot repay the loan at the end of two weeks, the loan can be “rolled over” by simply paying just the interest due. Unfortunately, the interest continues to accrue. In time, many borrowers find that they owe several times the amount that they initially borrowed in interest alone.

Several states have passed strict laws regulating these businesses, but they are often able to circumvent this legislation by doing business through out of state banks. Illinois has become the latest state to try to rein in these financial predators.

The Illinois law became law on December 6, 2005. This law represents the first time Illinois has attempted to tackle the problem and the law has the following provisions:

Interest is limited to 15.5% per month on payday loan transactions.

Interest may be charged for a maximum period of 35 days.

Borrowers then will have a 56 day, interest-free repayment period.

Places a limit on the number of times a loan may be rolled over.

Places limits on the maximum loan amount, adjusted for the income of the borrower.

These regulations must be presented to the borrower in both English and Spanish prior to issuing the loan.

While this should help, the law does allow interest rates of nearly 200% per year. That’s far less than previous levels, but it’s still quite high when compared to other types of loans. And payday loan shops are notoriously sneaky when it comes to finding ways to circumvent such legislation. With such high stakes, the motivation to find ways to continue to lend money at 500% per year is pretty strong. Still, it’s a nice first attempt by the Illinois legislature to address a problem that should have been addresses a long time ago.

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