Do banning payday loans really help?
13 states in the US have termed payday loans as illegal or put regulations that are unsavory for the business to continue. As a result, payday lenders have shut shop from these places and have wandered to regions where the business is more lucrative and of course, permissible.
One of the states in the US that have banned payday loans is Arizona. The state usury law prohibits lending institutions to charge anything more than 36 percent annual interest on a loan. On July 2010, a law that exempted payday lenders from this 36 percent cap expired. The State Attorney General Terry Goddard came heavily on these lenders and started ‘Operation Sunset’ where he tried to book lenders who charged higher than the lending cap. The expiration of the cap made the payday loan companies withdraw from Arizona and look elsewhere.
It does not really look that this move has helped because the alternatives are also going to charge as much. For instance, a couple found themselves short of extra disposable money for a tour. So, they decided to take an auto title loan, which allows people to use their vehicle as collateral for the loan. The interest rate on a $650 loan was $170 percent. The couple had thought that since there was no payday loan in their state, the auto title loan will be something of that sort, just that the payment that would be paid, would go directly to the principal. But they did not know that nearly most of the money that they repaid actually went towards paying the interest only and the principal was untouched. To sum it up, the outstanding balance never went down.
The couple and many others like them believe that auto title loans are like payday loans, in fact worse because they stand to lose their collateral as well. Payday loans charge high rate of interest that can go up to 400 annually, but auto title loans are also at 204 percent interest and can also put an important asset like your car, at stake.
Even though the couple managed to pay off their auto title loan, they had actually ended up paying twice the amount they borrowed. Of course, they will never apply for such title loans again. So, ho are auto title loans operating in Arizona, all 470 of them? This is a question that needs prodding. Also do banning payday loans really help? Since they are in the business, it is fair that they remain in one, provided there is a mutual understanding between the government and the lenders about the interest rate and fees that can be levied. By its concept, payday loans are great, considering they are the best source of short-term funding even for bad credit situation. If an arrangement could be made to auto-debit the money from the borrower’s next paycheck and the interest rate is toned down, it can be mutually beneficial to the borrower as well as the organization. What do you think; in states like Arizona, it is justified to payday loan companies out of business?
