Op-Ed

Cap payday-loan interest rates at 36%

As co-chairs of the Kentucky Coalition for Responsible Lending, a statewide coalition dedicated to protecting family assets by eliminating abusive financial practices, one of our major concerns is the high cost of payday lending.

Payday lenders are permitted to charge an annual interest rate of 400 percent. For several years, our coalition has sought a change in Kentucky law that would cap interest rates on payday loans at 36 percent. We are hopeful that the Kentucky legislature will enact this much-needed change in the next session.

Opposition to high-cost lending is an issue of concern to the broad and diverse group of organizations throughout the state that make up our coalition. Those working to fight against these abuses include well-respected groups such as AARP, the AFL-CIO, the Louisville Urban League, the Family Foundation and the Louisville/Jefferson County Branch of the NAACP.

In addition, a significant number of churches and faith-based groups — the Kentucky Council of Churches, Catholic Charities, the Catholic Conference of Kentucky, the Jewish Community Relations Council, Citizens of Louisville Organized and United Together, Building a United Interfaith Lexington, Habitat for Humanity and the Society of St. Vincent de Paul — have spoken out against the harmful rates charged by these lenders.

Recently, the Kentucky Baptist Convention, the state's largest religious denomination, passed a resolution at its annual meeting encouraging Kentucky to establish an interest-rate cap of 36 percent on all small loans. The convention cited passages from the Bible condemning usury and asserting the proper role of the government to protect people from predatory activity.

The convention also cited data from Kentucky's payday-loan database, collected over a full year by Kentucky's Department of Financial Institutions. In spite of the industry's claim that payday loans are short-term debts, the data prove otherwise. A typical Kentucky borrower took out 10 payday loans in the past year and was indebted by those loans for an average of 160 days. Because of the short repayment terms, typically 14 days, the average borrower is unable to repay in full and has to take out another loan to repay the first.

In effect, the borrower is paying another $45 every two weeks to borrow the same $300. After 10 such renewals, the borrower will have paid $450 in interest on a $300 loan.

Nationally, 75 percent of all loans are churned in this manner. Because payday loans in most cases turn out to be long-term debts, an annual rate of interest is an entirely appropriate and accurate measure of the cost. In fact, Kentucky and federal law both require that interest be calculated on an annual basis and that the annual percentage rate be stated in the payday-loan contract.

The business model of the payday-loan industry is to entrap borrowers, through high interest rates and short repayment terms, into a continuous cycle of debt from which it is very difficult to recover. The Department of Defense was so concerned about the effect on military readiness that Congress passed a 36 percent rate cap on payday loans for military families.

In addition, 17 states and the District of Columbia have either never allowed payday lending or have limited interest to about 36 percent. Kentucky families deserve this same protection.

In 1998, payday lenders successfully pressured the legislature to exempt them from the usury laws that cap interest on other small lending at 36 percent. In today's financially difficult times, when Kentucky families are struggling to make ends meet and when interest rates on most loans are at an all-time low, it is outrageous that Kentucky continues to allow the payday-loan industry to charge such exorbitant rates.

Last year, after hearing from the industry and citizens around the state, the Consumer Advisory Council, which makes legislative recommendations to the governor, determined that 400 percent interest rates were too high and that a rate cap was in the best interest of Kentucky families.

It is time for the legislature to act. Call your representative and senator today and ask them to support a 36 percent cap on payday loans in the next session.

For information, visit our blog at Kyresponsiblelending.wordpress.com or contact us at (502) 333-6012 or (502) 209-5382.

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