Most consumers know that the term “payday" loan refers to small, short-term loans made by businesses at extremely high interest rates. The only advantage is access to fast cash, but the fees for payday loans can be extremely high and the interest rates can be crippling at as much as 911% for a one-week loan; 456% for a two-week loan, 212% for a one-month loan. The problems associated with payday loans are abundant as they can easily become a financial trap for many consumers.
Even though the payday loan industry generally claims that their loans are intended to be used only on a one-time basis, the consumers who borrow money in this manner are usually already in deep debt and the high rates make it extremely difficult for them to repay their loans, putting them into a revolving door of debt. When consumers cannot repay their payday loans, they often have to extend their loans and pay the fees several times over, causing them to end up paying far more in fees than the amount they borrowed in the first place. These types of loans often put people in worse financial shape then when they started, as borrowing money at triple-digit interest rates has been likened to using gasoline to put out a fire.
Many consumer advocates and legislators have tried to change the rules governing the payday loan industry, and the latest attempt to rein in the process comes from Sen. Lee Heider, of Twin Falls, Idaho who recently announced he will introduce new legislation to regulate the payday loan companies in his state. At a recent joint press conference with the Idaho Community Action Network, Heider said that his proposed legislation would cap the loan interest rates at 36% and enforce more transparency on the lender’s loan terms to prevent hidden fees and spiraling interest rates. Heider said that although 36% is still a high interest rate, it is undeniably better than what most payday loan companies currently charge, and added that his proposal is a sensible solution to a widespread problem. If he is successful, it is a good bet that similar legislation in other states without current regulations on payday loan interest rates will likely follow.