Federal Legislation To Cap Payday Loans Interest Rates At 36%
15 Nov 2019
Approx Reading time: 3 minutes
- Five legislators to bring a bill to the House that will cap payday loans interest rates at 36%
- Congress wants to expand the Military Act that caps interest rates to all American consumers
- Payday lenders oppose proposal saying that such a move will limit several Americans from accessing credit
Payday Loans are prevalent among Americans who rely on them to cover emergencies and payment of bills. These loans come with very high-interest rates of almost 400%. Because of the high rates, some people find it hard to repay the loans, and they find themselves in a continuous debt cycle.
Payday loans interest rate cap
However, the high-interest rates payday loans charge could soon be a thing of the past. Five legislators are planning to introduce legislation that could do away with high rates on consumer loans, including payday loans. The Veterans and Consumers Fair Credit Act would limit interest rates at around 36% for all consumer loans.
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It is not the first time there is a discussion on cutting the high-interest rates on payday loans. In 2006 President Bush signed a law capping interest rates for active-duty service members. It was after it emerged that military personnel was getting in trouble with payday loans and other loans.
Legislators seeking expansion reduction of consumer loans interest rates
The Act caps interest rate for active military personnel at 36% and also providers other safeguards. The Congress members are now seeking to expand the provisions of the Act to veterans and all Americans. The legislation will expand the protections and safeguards to all consumers. It will cap rates at 36%, which is lower than the current 391% APR charged by payday lenders. Payday loan interest rates are almost 20 times more than credit card APR.
Wisconsin Rep Glenn Grothman and Jesus Garcia of Illinois 4th District are co-sponsoring the bill in the House. Senator Sherrod Brown, Jack Reed, and Jeff Merkley are will also introduce a parallel bill in the Senate.
Grothman indicated that there is already a bill dealing with military bases and military personnel. Therefore the bill should extend beyond safeguarding military troops to include other consumers that payday lenders have been exploiting.
Payday lenders oppose cap interest rates
Payday lenders have been arguing that they have high rates because of the risky nature of payday loans. Consumers can quickly receive loans without any collateral. All that a consumer needs in some states are proof of income, bank account, and a valid ID. There is a possibility that having a nationwide interest-rate cap could receive some strong opposition. For instance, the American Bankers Associate has previously opposed such an idea with payday lenders already expressing their displeasure.
However, the payday loans have been attracting criticism from consumer advocates who see them as debt traps. It is because the loans are expensive, and consumers cannot repay them immediately and leaving them stuck in a borrowing sequence. According to the Financial Protection Bureau, around 25% of consumers reborrow payday loans at least nine times or more.