As the abuses of the payday loan industry and the number of people trapped by these practices continue to be exposed in the national media, several public officials have called for an end to their predatory practices. Many payday lenders are even putting their businesses for sale. Investigations have found that many of these practices were unfair to consumers and the terms of the loans were created to keep the borrowers trapped in a vicious cycle of debt. Because of this information, many lawmakers have called for restrictions on the payday loan industry so they will no longer be able to take advantage of low income citizens.
What Is The Problem?
At issue are the practices commonly used by the payday loan industry to obtain high fees from the economic hardship loans they make to individuals that need a short term loan. These payday lenders will often charge their borrowers close to 400% interest for the short term loan and require the loan to be repaid within two weeks, which is often not long enough for the individual to make enough additional money to pay off the loan. The result is that a large number of the individuals that take out a single payday loan often have to take out multiple additional payday loans to get back on their feet, while the payday loan industry collects its massive fees on each transaction.
The payday loan industry claims that the interest rates and fees that they charge for the loans are necessary to provide a profit for the company. They claim that they are often the only place for these individuals to obtain the money they need in times of economic hardship and that changing the terms of their loans would result in the payday loan companies closing and putting thousands of individuals out of work. They also claim that any action taken against the payday loan industry will end up hurting the average consumer by removing a solution to their economic needs.
What Lawmakers Propose
Lawmakers across the country are understandably skeptical about the claims put forward by the payday loan industry. For years, they have been listening to the payday loan industry make the same claims while watching more and more of their constituents fall into to the trap set by the lenders. It has been estimated that the average consumer that takes out a payday loan will end up taking out 9 or more loans throughout the course of the year and end up paying the lender hundreds of dollars in fees in order to break free of the loan.
Some lawmakers believe that the practices used by the payday loan industry are unfair and are looking for ways to curb them. One notable example is the bill making its way through the legislature of Ohio, which would place unprecedented new restrictions on the payday loan operators that do business in the state. Any business that objected or refused to abide by the restrictions would not be allowed to do business in Ohio.
The bill would cap the interest rate that payday lenders are allowed to charge borrowers at 36%, more than 100 times lower than what many in the industry currently charge, and limit the number of loans that an individual could take out in any calendar year to four. Any individual that wants to take out three payday loans in a 90 day period would have to attend a financial management class to help them manage their finances and avoid having to take out a payday loan. Lawmakers believe that these are some of the steps that need to be taken to eliminate the cycle of debt perpetrated by the payday lenders.