Today, we take a look at some of the misconceptions brought on by politicians when it comes to payday lending. One example is a Colorado group campaigning to limit charges for what they call payday loans claims that current law allows payday lenders to charge more than 200% interest for small loans targeted at customers who are often in dire straits. The claim is in support of Proposition 111, a Colorado ballot measure to cap annual finance charges at 36 percent for small-dollar loans.
Is the claim by the group Stop Predatory Payday Loans accurate? Does current law allow payday lenders to charge more than 200 percent interest for small loans?
No, the claim is inaccurate and deceptive. First, the group’s reference to 200 percent interest conflates interest rates with finance charges. The interest rate is only one of the charges that may be levied on a loan, and Colorado law currently allows four distinct types: 1) a flat-fee origination charge; 2) an interest rate not to exceed 45 percent annually applied to the amount financed; 3) a monthly maintenance fee based on the amount borrowed; and 4) a one-time only charge of $25 for non-sufficient funds (i.e., when a borrower’s check to the lender does not clear).
Second, the 200 percent interest cited by the group relates to loans that remain unpaid after 12 months. However, just 0.2 percent of the small-dollar loans in Colorado in 2015 were written for one year; nearly 83 percent were written for six or seven months [Read more…]