Legislature must set cap on payday loans
May 21, 2006 - Nashua, New Hampshire
BACKGROUND: Six years ago, New Hampshire removed caps on the interest that can be charged on payday loans, and the state is now seeing usurious interest rates on this type of short-term borrowing.
CONCLUSION: The Legislature must stop dawdling and reinstate interest caps on such loans to protect vulnerable borrowers from exorbitant rates.
New Hampshire prides itself on the motto "Live Free or Die," but if you are surviving paycheck to paycheck here -- the living can be anything but free. And, the interest can be a killer.
Since 2000, a type of short-term personal borrowing, known as a "payday" loan, has been exempt in New Hampshire from interest rate caps that are applied to many other forms of consumer lending. The result: If you need an advance on your paycheck, that $500 for two weeks will cost you $100 in interest. Translated -- that equals 521 percent annually.
In many states that is illegal, but the Granite State seems to encourage it. In fact, a bill that could protect consumers from this predatory lending is stalled in the state Senate in Concord.
New Hampshire is the only state in New England that does not cap interest rates for payday loans. It is no surprise, then, that there are no payday lending offices in Massachusetts, but 30 in New Hampshire, and the number is growing. More than 115,000 payday loans were written here in 2005, a 28 percent increase over 2004.
The upswing in the cash-advance business in New Hampshire began in 2000 after the state lifted the cap on interest rates for small loans. Supporters claimed the intent was to help high-risk consumers get access to small loans, as an alternative to using credit cards.
Many states, of course, cap interest rates on credit cards, and typically they top out at 18 to 24 percent. This is done to protect consumers, especially those who are desperate enough to be vulnerable to offers of 521 percent interest.
Usury is an archaic term, but historically it is the act of charging whatever the traffic can bear for a loan. The term and the practice date back thousands of years and at the time it was considered reprehensible enough to be banned by many religions. More recently it is used to describe the act of charging more than the legally approved interest rate.
As far as New Hampshire is concerned, usury does not apply to payday loans. Cash advance offices are free to set interest rates as high as they wish, as long as they are properly disclosed to customers.
In a half-hearted attempt at consumer protection, the state did address the payday loan boom with legislation in 2003. Unfortunately, the bill does little to actually protect consumers and did nothing to regulate predatory interest rates.
Instead, it capped loan amounts at $500 and limited the term of a loan to 30 days. The average loan in New Hampshire is $361, close to the national average, so the $500 limit is largely meaningless.
In fact, this means on average that consumers are borrowing $300 and paying back $360 two weeks later. Loan sharks were best known for breaking kneecaps when customers could not pay, but otherwise their business practices seem uncannily similar.
Consumers need to understand that there are alternative lending sources and financial counseling available. Many credit unions require minimal account balances and provide loans as small as $200 at rates as low as 6 percent.
More importantly, the New Hampshire House and Senate must stop dawdling and correct the error they made six years ago and re-regulate the payday loan industry.
Why are we the only state in New England that allows these anti-consumer practices to continue? Are our citizens, especially those in vulnerable circumstances, unworthy of the same basic consumer protections?
Unless the Legislature corrects the situation, it looks like our elected lawmakers are saying yes to the latter question and content to let the fleecing continue.
The Telegraph, Telegraph Editorial
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