The Rhode Island state General Assembly is considering legislation that could have a big effect on payday loan lenders in the state. A legislative committee was reviewing a bill that would restrict interest rates on short-term loans on Tuesday, April 2.
Although it could be adjusted, the bill, as it was given to the committee, would prevent lenders from charging more than 36 percent in annual percentage rate on a loan. This would mean a serious reduction in the amount of interest that lenders typically charge for these types of loans.
Before this bill was introduced, Rhode Island already restricted payday loans to no more than $500, a two-week term, and 10 percent interest over those two weeks. Because the loan is for such a short term, this means that the lender is still charging 260 percent in APR because this looks at the percentage charged over the term of the loan.
This means that this loan would be 10 percent every two weeks, which gives you the 260 percent for one year. If a payday loan was restricted to 36 percent APR, then a lender could only charge $1.38 per $100 on a two-week loan.
While this sounds like a great deal for Rhode Island residents, the problem would be that it could severely restrict availability of payday loans, which are about the only option for people with poor credit in need of cash quickly for a short period.
Legislation in Rhode Island may force payday loan lenders to pull out
First of all, many lenders will choose to stop servicing Rhode Island, especially online lenders that service multiple states. Because the overhead costs are the same for a lender regardless of the size of the loan, many lenders will most likely require a larger minimum loan to make it worth their time to do the loan.
Payday advance lenders also will most likely make it more difficult to qualify for a payday loan. This is because if one person defaults on a maximum $500 loan, the lender would have to have 73 maximum loans paid in full to cover the cost of one person defaulting, which would be a default rate of only 1.4 percent. Counting on borrowers with poor credit or no credit to default at such a low rate is very risky indeed.
For many people, this type of legislation is seen as a restriction of fair trade. A poll of Rhode Island residents done by Fleming & Associates in March 2013 found that two-thirds of respondents “agree that the government should not tell working adults whether or not they can take out a payday loan.” Also, 58 percent “oppose government restrictions on payday loans that could eliminate access to this credit option.”
The legislators that introduced the bill have said they are concerned about people that get stuck in a cycle of debt because they continually renew payday loans and rack up large amounts of interest payments. However, if a payday loan is not available for someone with no other option, they could be saddled with even higher costs of late fees for bills or bank overdraft fees.
Borrowing from payday loan lenders may not be an ideal solution; however, for some people it is the best option they have, but it may not be for long in Rhode Island.