Expand Economic Opportunity and Reduce Child Poverty

Cap Interest on Small Loans at 36 Percent

Unscrupulous lenders affer a number of small loan products to low-wage families and charge exhorbitant interest rates.

• Payday loans. An estimated 10 million Americans take a payday loan each year. Payday loans are cash loans based on the borrower’s personal check held for future deposit by the lender. Typical loans are for over $300, due on the borrower’s next payday, at a cost of $15 to $30 per $100 loaned or 390% to 780% annual percentage rate. [i] See more research on payday loans.
• Car title loans. Similar to payday loans, car title loans allow car owners to borrow against the value of their vehicle. Typically these loans have triple digit interest rates and require the full amount of the loan to be paid back in a short period of time. Far too often borrowers cannot pay back the loan and end up borrowing more to meet their debt. [ii]
• Refund anticipation loans . Refund Anticipation Loans (RALs) are offered by commercial tax preparation firms to tax payers who want to receive their anticipated refund right away and not wait for their tax return to be filed and refund issued. These loans present a unique challenge for policymakers because they are largely governed by federal policy. Therefore the state rate cap will not apply, although there are measures that can be pursued at the state level.

Advantages of a 36% Rate Cap

Because a variety of small loan products exist (and more variations continue emerging) a flat cap on annual percentage interest rates is considered the most effective strategy for prohibiting excessive interest rate charges.

• Demonstrated success. In 2007, Congress enacted a 36% cap on loans to all military personnel and their dependents, and Department of Defense research shows that these caps lead to fewer instances of military personnel getting into deep financial trouble. [iii]
• Closes loopholes. Many attempts to regulate particular types of small loans have proven ineffective because lenders have developed alternative loan products to circumvent the rules. Similarly, some states have enacted broad rate caps, but have created exceptions for selected products, thereby diminishing the effectiveness of these caps. [iv]
• Preserves lending options. According to the University of North Carolina’s Center for Community Capitol, placing caps on payday lending in North Carolina did not negatively impact consumers’ ability to get credit when they needed it. It simply took away a single credit option that had high fees. [v]

Useful Resources for Policymakers

• 50-state analysis of state payday lending laws , produced by the Consumer Federation of America.
• Model legislation promoted by the The American Association of Retired Persons (AARP) and the National Consumer Law Center. [vi]
  

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