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- Why 36 is the Fix for Small Loans in Indiana
Friday, January 5, 2018
For the past two years, a wide array of organizations,
ranging from military veterans, local charities, churches, advocates supporting
strong families, and many others have fought new high-cost loan products like
this one proposed in 2017 which would have
allowed payday lenders’ to make installment loans reaching 240% APR. While it’s
satisfying to defeat a bad bill, much of the testimony we’ve heard from communities
across Indiana has focused on the damaging effects of current high-cost loan
products – including so-called “payday loans.”
This year, we want to focus on a solution. We did our
homework, combing research studies and looking at the effects of other states’
reform efforts. And we decided that a cap of 36% APR (annual percentage rate)*
– as 15 other states have set for all loan products, including payday lending,
and more have done for installment lending – is the best solution to the
problem at hand.
What exactly is the problem we’re trying to solve? High-cost
loans, whether they are due in two weeks or over a period of months, tend to be
aimed at lower-income borrowers with little regard for their ability to repay
the loan and can wreak havoc on their emotional well-being and financial
stability. In fact, the higher the cost of the loan, the more a perverse
incentive is created: lending to a struggling borrower who eventually
defaults can be more profitable than lending to a somewhat better-situated
borrower who doesn’t need to reborrow or can repay the loan early. The lender
can turn a profit even if the borrower ultimately must declare bankruptcy, so
long as she is able to take & repay enough payday loans or make a certain
number of payments on an installment loan, which the lender helps to guarantee
through direct access to the borrower’s checking account. As a state with one
of the highest
bankruptcy rates in the nation, we should be looking to curb these kinds of
products, not expand them.

To be clear, establishing a 36% rate cap in a state that has
existing payday loan stores typically means that many of the stores that
specialize in only making triple-digit interest rate loans would choose to pack
up and head elsewhere. But studies from North
Carolina and Arkansas
suggest that even the majority of their customers see that as a positive. They
engage a variety of more affordable options for handling budget shortfalls. And
the myth that people flock in greater numbers to the wild west of the internet
seeking these loans is just that – a
myth. Even so, a rate cap in Indiana would apply whether the loan is made
from a store or online.
Indiana has some house cleaning to do to get to 36%. Our
small loans statute permits payday loans of
up to $605 with an effective ceiling of 391% APR. And even our current installment loans statute - which permits a 36% finance charge on loans up to $2,000 – allows an additional fee outside that cap that can bring the APR well above 36%. Even so, proposals are expected again this year to increase fees and interest rates.
up to $605 with an effective ceiling of 391% APR. And even our current installment loans statute - which permits a 36% finance charge on loans up to $2,000 – allows an additional fee outside that cap that can bring the APR well above 36%. Even so, proposals are expected again this year to increase fees and interest rates.
Senator Walker’s 36% rate cap legislation zeroes in on payday
loans, and we will fight for it with all we have. But you can also count on us
to remain vigilant against efforts to expand fees and interest on other types
of loans, and to continue our efforts to right the ship for Hoosiers trapped financially underwater by establishing clear and fair
consumer protection laws that promote safe, affordable products and steer us
clear of relaxed rules that incentivize drowning the borrower.
*Annual percentage rate (APR) = a standardized method for
representing the cost of credit on consumer loans, permitting comparison of
different types of loan products.