Senate bill S. 582, dubbed The Interest Rate Reduction Act, was proposed and introduced to the Senate by Senator Bernie Sanders of Vermont. A companion bill, H.R. 1640 was also introduced in the House by Maurice Hinchey of New York. The Interest Rate Reduction Act would extend interest rate caps -that currently protect federal credit union members from excessive "loan shark" interest rates. The bill would also block lenders from imposing excessive fees to avoid rate caps.
The bill mirrors the usury cap established by the Federal Credit Union Act and applies it to all forms of credit. That cap is 15% by statute, but the National Credit Union Administration has exercised its authority to raise it to 18% APR, where it has been for many years.
According to the Center for Responsible Lending, payday loans carry an annual interest rate of 391 percent and are so difficult to pay off that many borrowers end up paying more in interest than they originally borrowed. The average borrower pays back $800 for a $300 loan, a loss of $500 that goes purely toward interest. Twelve million Americans are caught in the trap every year.
Support the Interest Rate Reduction Act by sending a letter directly to your legislators here.
See a letter of support for this bill from AFFIL and their partners (PDF)
here's a small portion of it;
"... Banks routinely induce consumers to incur thousands of dollars of credit card debt, then double or triple their interest rates to unaffordable levels once the consumer is on the hook. Other lenders also charge unreasonable interest rates, including some auto loans, installment loans to our military service members, tax refund anticipation loans, and payday loans at triple digit interest rates.
These trends are only exacerbated by the current financial crisis. As bank losses mount, they are attempting to compensate by notifying millions of customers of interest rate hikes. Other families who cannot find affordable credit are increasingly turning to legalized loan sharking by payday and other predatory lenders. MORE
What else can you do to avoid unfair "big" bank fees and interest rate spikes?
Many people have been turning towards credit unions in order to avoid excessively high interest rates currently being imposed by most big banks. Learn about American Debt Relief Challenge and how you can save money by turning towards your nearest credit union by reading this earlier blog; Stick it to the Credit Card Companies. Here's How!
The bill mirrors the usury cap established by the Federal Credit Union Act and applies it to all forms of credit. That cap is 15% by statute, but the National Credit Union Administration has exercised its authority to raise it to 18% APR, where it has been for many years.
According to the Center for Responsible Lending, payday loans carry an annual interest rate of 391 percent and are so difficult to pay off that many borrowers end up paying more in interest than they originally borrowed. The average borrower pays back $800 for a $300 loan, a loss of $500 that goes purely toward interest. Twelve million Americans are caught in the trap every year.
Support the Interest Rate Reduction Act by sending a letter directly to your legislators here.
See a letter of support for this bill from AFFIL and their partners (PDF)
here's a small portion of it;
"... Banks routinely induce consumers to incur thousands of dollars of credit card debt, then double or triple their interest rates to unaffordable levels once the consumer is on the hook. Other lenders also charge unreasonable interest rates, including some auto loans, installment loans to our military service members, tax refund anticipation loans, and payday loans at triple digit interest rates.
These trends are only exacerbated by the current financial crisis. As bank losses mount, they are attempting to compensate by notifying millions of customers of interest rate hikes. Other families who cannot find affordable credit are increasingly turning to legalized loan sharking by payday and other predatory lenders. MORE
What else can you do to avoid unfair "big" bank fees and interest rate spikes?
Many people have been turning towards credit unions in order to avoid excessively high interest rates currently being imposed by most big banks. Learn about American Debt Relief Challenge and how you can save money by turning towards your nearest credit union by reading this earlier blog; Stick it to the Credit Card Companies. Here's How!
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Denise,
What do you propose that these consumers do to get the money that was provided to them from these "predatory" lenders?
I'm assuming that many of these consumers spent the money on emergency items like fuel for their cars to get to work, medicine for their selves or their children, to get the money in the bank to prevent even higher "bounced check" fees etc, etc.
I had an older lady come into my store today, a pawnshop, to borrow 20.00 to pay for some medicine.
She has probably borrowed 20.00 8 times over the last 10 years and she has always paid back the 5.00 interest every time. We checked out her chainsaw outside to try to get it to crank and we were not able to get it to work so we loaned her the money on one of her rings.
We check out items, store the items, insure the items and redeliver the items when the customer comes back. All of this work for 5.00 dollars NET profit. Some loans are higher, some lower but they all require that we go through this process to make a loan.
If the APR is lowered to a level like mentioned in the article we will not be able to stay in business. A uninformed persons knee jerk reaction would normally be "great, you don't deserve to be in business" as one prominent senator was over heard saying. When and if we go out of business due to not being able to cover our cost, the people that you are trying to protect will have one less option left to get emergency cash, usually the last option. We provide emergency loans to people where the majority redeem their goods around 60-70%
Doesn't it make sense that sometimes borrowing money at even the rate we charge is less expensive when you look at the entire picture than not being able to borrow the money?
I had a customer that brought in a TV yesterday to borrow some money to be able to buy some lunch for her children but the TV was too old to be able to loan on so I took some personal money and gave it to her as a gift to be able to feed the children so please do not paint all of us with a broad brush like we're some type of loan sharks out to take advantage of customers. Let the market set the price of interest. If it can be done for less by others that should be the determining factor if we stay in business. But removing a option from needy people is not the answer.
We offer non recourse loans where if and when the customer do not pay back the loan it does not affect their credit.
I know that legislation like these, at a time like this seems to garner a lot of attention for those supporting the bills but in the real world down here on the front line it's every ones means of life does not change instantly when the bills are passed. The fallout to those that are in need will be greater than you can imagine.
I know that it might be hard to imagine but try to see yourself in a spot where you need 50.00-100.00 to keep the lights from being turned off or to fill the car with gas, or (fill in the blank). Now you have exhausted all of your family and friends and all other means to get the needed money in the next few hours. Would you not want to have the last option of taking some collateral down to the local pawnshop to get that needed money? Can you really say that you would not want that option to exist?
If that 50.00 that cost you 12.50 in a month saved you from having to pay to have your electricity turned back on, or an increased deposit, or loss of a job by not being able to get to work due to lack of gasoline, or a child not being able to get antibiotics until next week etc,.. Are those not justifiable reasons to be able to borrow the money from a Pawnshop?
I feel that if you are truly honest with yourself, you would have to admit that there are times that having that option available is beneficial to the customer compared to the alternatives of not having them available.
I have a store that currently employs 7 persons counting myself and we have a 12,000 square ft building that we use to store the merchandise.
I hope that I have been able to share some behind the scenes workings of a pawnshop and also why we should be "written out" of any proposed legislation that may be in the horizon.
Regards,
Phi
Phil -thanks for taking the time to comment and share your insight. I can see that your trying to help the same people that are being harmed by big bank fees, and loan shark interest rates.
Unfortunately, the lending industry doesn't have their community or customer needs at heart. If they did, we wouldn't be where we are today. There wouldn't be a need to initiate credit card reforms, a Consumer Financial Protection Agency or Interest Rate Reduction Act in order to stop and overcome the widespread greed, fraud and corruption. The truth is, if the lending industry had a genuine interest in helping the less fortunate (and our economic recovery) they could come together to put forth as big of an effort to "fix" the problems, as they did when creating and exacerbating them. Their economic skills and ability to figure out how make mammoth profits and 7 figure incomes, could go along way in helping our recovery. But sadly that still doesn't appear to be their focus.
Sure everyone needs to make money on their investment -but isn't 400% just a bit too much? The payday lending business model is set up to watch consumers fail. The system puts borrowers on a never ending debt treadmill. The lenders make most of their money from borrowers who roll over their loans because they can't pay the debt as quickly as needed or planned. With significant fees, interest rates and bounced check charges accruing, the damage quickly grows to a point that it's next to impossible to recover from.
With so many people out of work and hurting today, they continue to struggle to put food on the table. And it appears that those who could help by modifying loans, reducing interest rates and leaving credit lines accessible so credit scores aren't damaged, are not doing so. I think you would agree that's bad for consumers and our economic recovery. And that's why we need reforms and accountability.
Denise,
Thanks for posting my prior comment and I would like to take the answer some of your questions or at least to be able to share some more scenarios.
You used the APR of 400% as possibly being a being possibly a "bit too much" as far as making money on investments. I think that everyone should realize that there are 3 factors that come into play that determine what the APR needs to be to stay in business.
1. Loan amount
2. Loan period
3. Cost/logistics of servicing loan
If either 1 and or 2 are increased then the APR would not have to be as high. If 3 were lowered then the APR could be lowered to make the same net profit.
But when you have short term, small dollar loans and then you factor in what it cost the store to make and service that loan then this is what requires the APR to what it is.
Also remember that we do not end the year with the allowed APR on loans, this is what we start with. We then get to pay the help, the bills, etc etc
Does anyone set the amount of profit that retailers like Wal-Mart can make on their investments? I think that they rely on the competition to determine what a store can profit.
We're similar to a retail operation except that we "sell" money in exchange for merchandise where a retailer like Wal-Mart sells merchandise in exchange for money.
When you look at a 5.00 gross profit from a 20.00 loan in 1 month and consider all that goes into making that loan happen the 25% per month that we charge is not an outrageous charge.
Where customers that frequent payday lenders are not risking anything "tangible" except for their credit score, so they throw caution to the wind, in a Pawnshop, customers are actually putting up merchandise and are required to make a informed decision as they are not able to use the goods during the loan period and it is possible to lose the merchandise if the loan is not paid off.
This makes the customer think twice before getting the loan and as mentioned in the previous comment if that were to happen it is a non recourse loan where we do not come after the customer and we do not report to some credit agencies to lower their score.
Now what I imagine will happen when and if pawnshops are not excluded from these bills.
People will still have the need to borrow emergency money no matter what legislation sets the max APR except now instead of having a place to go to that is licensed and regulated the items will go to the "street" where there is no APR, or record keeping, or taxes being paid, or insurance on the items, etc.
If US citizens legally own their merchandise and occasionally need emergency funds to cover other expenses, should they not have the option and the right to take that merchandise down to a business that is able to loan them money on those goods until the debt is paid off?
Lowering the APR to the amounts stated will REMOVE the ability of US citizens from being able to get those emergency funds.
Pawnshops have been around for 3000 years (China) and have pretty much worked out all the kinks in what it takes to make it work. I think a industry that has been around for that length of time has had enough transactions under their belt and enough competition to drive the APR to the rate that it is today. Usually when the Government gets involved and starts making changes it causes more harm than good. We're the last safety net that is out there for consumers to get emergency cash in a time of need and their are those that are working toward removing this option.
Denise, have you even been to the point where you needed to borrow money from a Pawnshop?
If so then there was possibly a reason that you thought justified the fees that the money was going to cost you.
If you have not borrowed money from a Pawnshop then feel fortunate not to have been in that position.
I have personally been in that position before and I still pull those pawn tickets out of the top drawer every so often to remind myself what it is like to be in need and to treat my customers the way that I was treated by the person that loaned me the money in the time of my need.
I think that I will take that ticket and have it framed so that my employees and customers can see that we all need a hand at times.
Phil
Phil...I understand exactly where you are coming from. And, I can hear the sincerity in your concerns for your neighbors and community. It's apparent, not all businesses are the same and I probably shouldn't generalize. I wish more people had a sincere and sympathetic attitude towards those they serve. Though of course there is a need in this world for debt collectors, credit cards, debt repair, and even pawn shops -all fill a needed niche. Unfortunately, many in the lending industry take advantage of those who can least afford it. Not all have the same ethics and real passion to help others as you seem to have. In a perfect world they would look out for their neighbors and community as you do -but sadly, that's not the case. Maybe you could take a stand against those who aren't as kindhearted and offer suggestions as an example yourself, to better improve the industry. Thanks Phil...I appreciate your sincerity.
ok, my mind is blown from all of the "post bankruptcy loan" sources online! there's just too many and i'm not going to run my credit that many times
to try and find the best rate, lowering it further, so i need your help... ok, i was discharged from bankruptcy a year ago. since then i have two
credit cards for about a year that are NOT maxed and are paid on more than required. however, my credit score is 586. i'm looking for the lowest
possible interest rate, for my credit history( i know i'm not going to get prime rates). i'm just looking for a REPUTABLE, known place that will almost
guarantee me an auto loan.