APR Caps Lead to Effective Ban on Short-Term, Small-Dollar Consumer Loans
Instituting an annual percentage rate (APR) cap on the fees for short-term, small-dollar loans is an effective ban of the service and fails to address consumers’ need for credit, instead leaving them with one less credit option. In fact, the Center for Responsible Lending, which has led the campaign to prohibit small-dollar lending in various states, said that one state’s policymakers “fully understood that [an APR cap] would ban the product,” when the legislature passed an APR cap in 2008.1
Effective Bans
In recent years, several states and the District of Columbia have implemented APR caps:
• Arkansas • New Hampshire
• Arizona • North Carolina
• Colorado • Ohio
• District of Columbia • Oregon
• Montana • South Dakota
• Nebraska • Virginia
Not Economically Viable
APR caps create an environment that is not economically viable for many lenders, as they are unable to cover basic operating costs, such as wages, rent and utilities. For example, under a 36 percent APR cap, a $100 loan would yield a $1.38 fee, or less than 10 cents a day. No business – not a credit union, not a bank – can lend money at that rate without being subsidized. Lenders in states with APR caps were forced to close hundreds of centers, costing thousands of employees their jobs and leaving consumers with fewer credit options.
Unintended Consequences
Interest rate caps harm consumers by eliminating a critical choice for thousands of people who need short-term, small-dollar credit. Consumers’ need for credit does not disappear once these regulations are in place. Instead, they either cannot meet their financial obligations or they are forced to choose costlier or less regulated options, such as unregulated loans. Consumers choose small-dollar loans because they are cost-competitive, highly regulated and transparent.
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Case Study: The Portland Business Journal reported that after passing a 36 percent APR cap on short-term, small-dollar loans, and brick-and-mortar lenders closed their centers, Oregon became “a hotbed for illegal Internet payday loans.” The number of complaints against lenders filed with state regulators doubled after lawmakers passed the rate cap. Nearly 70 percent of such complaints filed in 2010 were against online lenders. By contrast, “We get few or no complaints about (licensed) payday lenders,” said David Tatman, administrator of Oregon’s Division of Finance & Corporate Securities. 2
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1 Business TN, September 2008.
2 “Borrowers Flock to Online Payday Lenders,” Matthew Kish, Portland Business Journal, February 11, 2011
Effective Bans
In recent years, several states and the District of Columbia have implemented APR caps:
• Arkansas • New Hampshire
• Arizona • North Carolina
• Colorado • Ohio
• District of Columbia • Oregon
• Montana • South Dakota
• Nebraska • Virginia
Not Economically Viable
APR caps create an environment that is not economically viable for many lenders, as they are unable to cover basic operating costs, such as wages, rent and utilities. For example, under a 36 percent APR cap, a $100 loan would yield a $1.38 fee, or less than 10 cents a day. No business – not a credit union, not a bank – can lend money at that rate without being subsidized. Lenders in states with APR caps were forced to close hundreds of centers, costing thousands of employees their jobs and leaving consumers with fewer credit options.
Unintended Consequences
Interest rate caps harm consumers by eliminating a critical choice for thousands of people who need short-term, small-dollar credit. Consumers’ need for credit does not disappear once these regulations are in place. Instead, they either cannot meet their financial obligations or they are forced to choose costlier or less regulated options, such as unregulated loans. Consumers choose small-dollar loans because they are cost-competitive, highly regulated and transparent.
______________________________________________________________________________________________________________________
Case Study: The Portland Business Journal reported that after passing a 36 percent APR cap on short-term, small-dollar loans, and brick-and-mortar lenders closed their centers, Oregon became “a hotbed for illegal Internet payday loans.” The number of complaints against lenders filed with state regulators doubled after lawmakers passed the rate cap. Nearly 70 percent of such complaints filed in 2010 were against online lenders. By contrast, “We get few or no complaints about (licensed) payday lenders,” said David Tatman, administrator of Oregon’s Division of Finance & Corporate Securities. 2
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1 Business TN, September 2008.
2 “Borrowers Flock to Online Payday Lenders,” Matthew Kish, Portland Business Journal, February 11, 2011