The Democrats have introduced the law on capping the interest rates on short-term loans for US consumers. They have done it both in the House and in Senate. The Protecting Consumers from Unreasonable Credit Rates Act intends to limit the interest rates to 36% APR the measure which is likely to put out of the market the majority of payday lenders and car title loans providers. Such companies usually charge the triple-digit interest rates and the 36% suggested will most likely be of no interest to them, as credit card companies also charge this amount, though it’s one of the highest rates.
Term of the Loan Matters
Most of the payday lending companies charge 15 USD on every hundred of dollars. If you have a year to cover the obligation, it would be just 15%, but with the payday loans, 15% is a fee for using the borrowed means for 2 weeks. Such interest rate easily turns into 390% APR.
The limit to 36% APR on a 2-week loan may only lead to the fee of 7 dollars instead of 75 on each 500 dollars borrowed. The practice shows that those states, which have passed the cap of 36% most of the lending companies have ceased their activity.
The main problem, which is connected with these loans, is their short term, not even a large fee (by the way, find out about 7 irritating fees and how you can avoid them). The most usual reason for borrowing from payday lenders is certain emergency expenses the consumer faces but lacks means to cover.
Having no money to cover the urgent expenses they face, people are not likely to have them neither in two weeks nor in a month, and one loan entails another one often with a greater fee to pay off the original loan. FYI, only 50% of Americans has emergency funds!
Circle of Debt
The personal internet loan for 2 weeks threat the individuals taking them into a vicious circle of debt. Director of Financial Services at Consumer Federation of America (CFA), Tom Feltner, underlines, that a sustainable loan is the one, which can be repaid in full and without further borrowing, thus the capping of rates should protect consumers from abusive practices common in various credit products which often top 400 percent APR.
The capping rates proposed at present are supported by consumer advocates, and about 40 organizations have already endorsed the bill, considering it to be the initial step towards the end of destructive lending.
Still the point of view on the legislation is not much promising as Democrats are sponsoring it, but while they control Senate, the House is controlled by the Republicans.
Some representatives in the House, Rep. Matt Cartwright (D-PA) is among them, are sure the support will be gained by both parties as it was already in the past since all the facts will become known. According to him, capping the rates and fees will protect most of the economically disadvantaged working families and enable economic recovery.
In 2006 the cap of 36% was introduced for certain credit products, while Republicans controlled the House, as well as the Senate. Cartwright promises to encourage the alternatives to small-dollar lending. The industry will for sure try to lobby against the measure, but the common sense and the support of the consumer groups should make lawmakers hear the from them as well.
“By capping interest rates, we can ensure affordable payments, better underwriting and fair repayment terms and take a big step forward toward ending the payday loan debt trap.” T. Feltner.