Are Government APR Caps Eliminating Competition Among Payday Lenders?

Jun 16, 2010, 13:34 ET from

LOS ANGELES, June 16 /PRNewswire/ -- A payday loan is generally defined as a short-term loan that is usually paid back on the borrowers next payday.  These short-term loans (also commonly referred to as a payday advance loan) are offered at a higher APR which helps to offset the operating costs of providing a loan, usually to those with bad credit which leads to higher default rates when compared to traditional lending institutions.  And although the payday lending industry argues that these higher APRs are necessary to cover the operating and licensing costs associated with running a successful short-term lending business, the media often criticizes direct payday lenders for pushing so-called "predatory" lending rates, and many State regulations have already "capped" APRs offered by these lenders to as low as 36% APR.  

Recently some financial analysts have begun to criticize the effects of the APR caps in certain States that have already enacted an APR cap or have flat out banned these types of loans.  A study of payday lending in Colorado has shown that shortly after an APR cap was put into action there was still a wide range of APRs and loan products offered within the State regulatory laws, while a few years later 95% of Payday Lenders were offering the loans at only the "maximum" APR.  Some are reading these figures as a sign that stricter regulation and ceilings on APRs are in fact eliminating competition between lenders, so that they can all charge the same maximum finance rates.  After all, when competition is eliminated it is usually the consumer who bears the burden of higher prices.  

It also seems that many consumers who live in States that have either banned or capped direct payday loans are now turning to internet lenders to find quick cash loans when they are in need.  Although there are many trustworthy payday lenders on the internet, such as, there are some sites that are set up to sell your information off to other lenders, many of which choose not to follow the State laws of the borrower but the laws of the State in which the websites reside.  This tactic allows the internet lender to offer payday loans to people in states where payday loans are actually illegal, and is often times referred to as the "choice-of law-model", but often times the lender ends up in court to defend their methods.  

It seems that perhaps our state legislators should take a deeper look into the effects of banning or capping APRs on payday loans. After all, if capping rates drives all lenders to set their rates at a "maximum" charge all the while eliminating thousands of jobs and limiting consumers short-term credit options, shouldn't we explore other regulatory options that would be better for our economy and consumers alike?