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Ohio Caps Payday Loan Rates

OhioPayday loans are a relatively recent phenomena, appearing in just the last decade or so. These short-term loans often have a high interest rate, especially when compared with more conventional loans such as mortgages, auto loans and even personal loans. Still, the payday loan market is booming, indicating that this is an area where consumers have created a genuine demand for a service.

Consumer advocates in many places around the country have raised concerns about the high interest rates on payday loans. They argue that these rates take advantage of customers when they’re in a desperate situation. Consumers don’t always agree, however, and are often willing to pay those fees for the sake of expediency or of convenience.

What complicates the matter, at least in part, is the fact that these loans are so short term. While the Annual Percentage Rate for a given payday loan may be in the triple digits, the actual fee associated with the loan may be a small amount – often $50 or less on a loan of several hundred dollars.

In Ohio, the issue of payday loans has made it once again to the legislature. The state of Ohio passed legislation recently that caps the interest rate on payday loans at 28 percent. This may fundamentally change the way that payday lenders operate in the state of Ohio, and may have a real impact on that particular market.

One report, released by the group Policy Maters Ohio, suggests that Ohio residents are still paying the high interest rates. In addition, Ohio’s recent legislation allows borrowers at least a minimum of 30 days to pay back loans, but many of these lenders were still requiring that the loans be paid back within two weeks or less. These lenders have found ways to circumvent the new law, or are operating outside the boundaries of the law.

Advocates in other states such as Illinois have also been pressing officials to cap rates on payday loans in those states, as well. Illinois passed legislation several years ago that set out to deal with the issue of payday loans. The 2005 Payday Loan Reform Act applied to shorter term loans. In response, payday loan lenders have created longer-term loans with the same triple digit high interest rates.

Illinois in considering new legislation to address this issue. The current legislation would lower the cost of borrowing, help to ensure that consumers don’t over borrow, and prevent them from using one payday loan to pay off another.

Advocates in Illinois and Ohio, as well as other states looking at the question of payday loans, are suggesting that state laws be changed to require a minimum of 90 days to pay back a loan, and that loan rates can then be uniformly regulated.…

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Are Payday Loan APR Caps Irresponsible? E&Y Study

dunce picWhen it comes to payday loans, there are people with some very vocal opinions. Some consumer advocates claim that payday loan lenders are unfair, that they take advantage of consumers who are in a tough financial spot, and that they aren’t offering a responsible product to the market.

Recently, E&Y set out on a national study to determine whether the pricing of payday loans was fair and reasonable. The findings of the study may be surprising to some, and suggest that the issue of payday loans isn’t as cut and dried as opponents would like for you to think it is.

The study found, among other things, that attempts by state legislatures or other governmental entities to create and impose an artificial cap on the rate for payday loans would have a detrimental effect. It would, in effect, eliminate a product that millions of Americans use to address short-term credit needs.

In addition, the study found that, on average, payday advance lenders charge just over $15 for each $100 lent to consumers. The average cost to the payday loan store was just under $14 for every hundred dollars loaned, meaning that their profit margin isn’t outside normal standards for retail or financial businesses. The average profit margin was 9.1 percent before taxes.

Lenders in the payday loan industry face far greater risk than those lenders who offer more traditional loans that require a form of collateral. Around 27 percent of the cost of each loan went toward bad debt.

Reducing the fees that payday loan lenders charge, then, would greatly impact the ability of these businesses to function. The vast majority of the more than 10,000 payday lenders around the nation operate within the percentages for profit margins outlined above, and would not be able to keep their doors open if rate caps were put in place.

A typical payday loan last for two weeks at a cost of $15.26 per $100 borrowed. This works out to an annual percentage rate of 397 percent. That rate sounds astronomical, and would certainly be if the loan were for a term of one year. The very idea of an “annual” percentage rate for a short-term product like this is, at best, misleading.

Incidentally, some of the proposals in state and federal legislatures would cap the APR at 36%. According to the E&Y study, this kind of a cap would make payday loans unprofitable. This would force the lender to stop offering the product.…

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