Washington Post comes out in favour of caps on payday loans

Yesterday's editorial in the Washington Post came out in favour of a 24% interest rate cap on payday loans in the state, and neatly summarised the issues relating to caps generally. Moves are currently afoot to introduce caps in 12 U.S states and the UK consumer may be wondering why it is that US payday lenders such as Dollar Financial (trading under the Moneyshop brand in the UK) continue to operate here with no limits on interest rates and fees...

The full article follows:

Salary Sinkhole
The District would be right to impose limits on payday lending.
Wednesday, August 1, 2007; Page A16

CHANCES ARE, everyone at some point has been short of cash. Most people, though, wouldn't even consider a loan if the interest totaled nearly 400 percent a year. That those who are least able to afford such exorbitant rates are being victimized by them is reason enough for the D.C. Council to follow through on plans to crack down on payday lending.

Before adjourning for the summer, the council gave tentative approval to a measure restricting the rate of interest on payday loans. Typically located in low-income neighborhoods, payday lenders offer short-term loans (generally two weeks) of several hundred dollars. All a borrower needs is a post-dated personal check and a pay stub verifying employment.

The current rate is about $16 to borrow $100 for two weeks, or an annual percentage rate of nearly 400 percent. Under the bill sponsored by council member Mary M. Cheh (D-Ward 3), payday lenders would lose their exemption from the 24 percent interest-rate cap that applies to lending in D.C. The industry is expected to pull out all the stops to block final passage, arguing that the service is needed because people without established credit have no other options. In fact, the business is rooted in the inability of borrowers to repay their loans in full and on time. People take out new loans to pay off old ones; the nonprofit Center for Responsible Lending estimates that a typical borrower (in the District that person is a single mother with little means) ends up paying back $793 for a $325 loan.

It is instructive that Congress, appalled by stories of soldiers and their families hobbled by debt, voted last year to put in place a 36 percent cap on payday loans for military personnel. At present, some 12 states, including Maryland, have moved against payday lending. One reason the industry is so alarmed by the prospect of the D.C. regulations is that they could have a ripple effect: Virginia came close to imposing restrictions this year. No doubt capping interest rates will cause some firms to stop doing business. But the experience of states such as North Carolina has shown that there is no adverse impact on consumers and that more responsible forms of lending fill the gap.