Here in Colorado we had an initiative on the ballot last week to restrict payday loans to a 36% APR cap. It passed overwhelmingly because the general public does not want to support lenders who charge triple digit rates. The law goes into effect on February 1 and it likely means the end of the payday lending industry in Colorado.
This change comes on the heels of an opposite move at the federal level where the CFPB said it plans to propose revisions to existing rules that were designed to reign in payday lenders nationally. The CFPB had spent six years doing research and decided that one way to make payday lending more responsible was to require a check on a borrower’s ability to pay. It makes sense as this is what pretty much all other types of personal loans require.
But the payday loan industry has become successful in part because lenders did not have to take into account a borrower’s ability to repay. By not having to do this important step lenders could save money and expand their borrower base. But in doing so they have been serving many people for whom a payday loan is clearly a bad idea.
I have no problem with payday loans at all, they have a place in emergency funding for people who don’t have any savings. What I abhor, though, is predatory lending. This is when the payday loan becomes a debt spiral as the loan is continuously rolled over and a manageable $500 loan becomes a $2,000 or $3,000 nightmare that the consumer cannot pay back.