Cap on The High Interest Rate Loans Will Soon be Affecting The Whole Country

Last Update: September 6, 2021 • Financial News • Loans •

Many Americans live paycheck to paycheck; this can only mean that they are almost always financially pinched. Therefore, they cannot bear the cost of emergency and everyday expenses such as paying necessary bills and buying groceries. Because of this, they turn to small-dollar lenders in a bid to offset their financial burden.

Small-dollar lenders offer credit opportunities to consumers with special financial situations like low income, financial distress, and low to bad credit scores. More often than not, these lenders help many people solve their emergencies and stay on their feet until the next paycheck arrives. However, the perks of easy loans come at a very high cost. These small payday loans have very high interest rates.

Small-dollar lenders often disguise the loan interest charges as fees, ranging from 200% to 500% APR.

If compared to the APR on credit cards, bank, or credit union loans (usually not more than 30%), small-dollar lenders make a big fortune every time a consumer receives credit.

On the bright side, the high interest rates on payday and other small emergency loans may soon be a thing of the past if the Veterans and Consumers Fair Credit act is legislated.

Consumers Fair Credit Act

The United States Military realized that many service members were shoulder-deep in serious debt about a decade ago. They found it quite challenging to settle payday or other emergency loans with high annual interest rates. For this reason, in 2006, Congress passed the Military Lending Act (MLA). The act protects all the servicemen on active duty and their families against predatory and abusive lenders who kept the military troops in debt for a long time.

The MLA legislation promised to reduce the loan interest rates for all consumers in the entire credit industry. Unfortunately, this was not because veterans and regular consumers were still at the mercy of paying high interest on small-dollar loans.

The high-interest rates on small-dollar loans always lead Americans to a financial crisis in even worse situations. Some consumers go as far as losing bank accounts; some get their assets as vehicles seized, and others end up in bankruptcy!

In early November this year, a few Congress members introduced the Veterans and Consumers Fair Credit Act to Congress and the senate. This federal credit act looks to bring high interest rates on various consumer loans (among them small-dollar loans) to an end and cap the rate at 36% for all consumers and veterans. The act extends the protections offered to all servicemen on active military duty under the Military Lending Act to all consumers in the U.S.

Jesus Garcia, the U.S. Congressman representing the 4th District of Illinois, was quoted saying, “Predatory loans are trapping families in a cycle of debt. We’ve all seen how the Military Lending Act has preserved the servicemen’s access to credit while protecting them from predatory payday lenders. Some states have already extended these proven protections to their residents, but my constituents in Illinois remain vulnerable to the financial effects of payday loans. All American consumers deserve the same protections from vicious debt traps that active-duty service members receive, and the Veterans and Consumers Fair Credit Act will do just that.”

What Do Lender Advocates Say About The Cap?

Like most bills introduced to the house, the nationwide interest-rate cap did not go unopposed. Small-dollar lender advocates are already speaking up against the act dramatically.

Mary Jackson, the Online Lenders Alliance CEO, estimates that the cap will deny credit access to millions of Americans who need it. “People need these loans. And yes, the interest rates are high, but it is justified because lenders take a big risk by just making out these loans,” she says.

Payday lenders do not require collateral to make out loans. They use the loan fees to guarantee that borrowers will pay their debt. With the cap in place, the lenders will require collateral, which most consumers cannot afford.

Most borrowers who take out payday loans have immediate problems to solve. For example, they can’t get to work because their car broke down, or there’s an urgent electricity bill to be paid – the loans come in handy. For this reason, Mary Jackson argues that a rate cap would deny loan access to the people who need it.

Conclusion

A few states like New York, Massachusetts, Connecticut, Colorado, Arizona, and South Dakota, have already passed the interest rate cap legislation.

Major detractors of the practice assert that payday lenders take advantage of borrowers by charging outrageous fees. They also say that payday lending keeps borrowers in a continual cycle of debt that could lead to bankruptcy.

These charges are valid, but a nationwide cap may also bring about some unintended consequences.