Will there be an Interest Rate Cap on Loans?

When payday loans were first introduced to the country in the late seventies, they were hailed by many as an opportunity to help the struggling poor who lived paycheck to paycheck and had trouble making ends meet. The business model proved a wild success and in short order, into the eighties, payday loan centers began springing up in neighborhoods across the country. Soon, however, a downside to the industry came to light (and under attack) as it was shown that the fees charged by payday lenders are extremely high when calculated out against a traditional APR (annual percentage rate) loan.

In response to the mounting criticism, the Congress of the United States began to look at options that could control the interest rates of payday loans and they were met immediately by resistance by the states who insisted that the control of payday loan lenders was something that was within the purview of the states alone and not for the federal government to manage. The federal government backed off under the pressure and now the matter is almost entirely left to the states.

Methods of Control

The primary method decided by most states to control payday loans was to immediately install legislation that limits or caps the calculated interest rates that lenders are allowed to charge for their loans. Some states put the matter before their voters on the ballots while others simply sought to pass laws in the state capitols. Both methods have proven surprisingly ineffective, however, a measure put before the people of Arizona and Utah, for example both were soundly defeated, and those laws introduced to legislature are having a difficult time getting through committee or the necessary support from either side.

A second method of control over the industry that many states have adopted, is to limit the number of times that a payday loan may be rolled over or extended beyond the original term. This practice of extending loans makes the loan exponentially more expensive and can lead to a spiral of very damaging debt.

A Federal Cap Is Introduced

Though the federal government backed off of the idea of controlling payday loans in all of the states, it has taken a step in a method that is completely within its power and right – passing a law that limits the amount that can be charged to military members. In 2007 the matter was addressed by bills introduced to Congress and accepted but not yet voting on. The bills are in two slightly different versions that will require reconciliation before a law is actually put into effect and the process may be stagnating.

Expect Caps All Around – Sooner or Later

Though the idea of capping interest rates of payday loans seems to have hit a brick wall in many states, like a bad rash, the idea simply does not seem to want to really go away. Bills are introduced and re-introduced regularly. This tactic generally results in the passage of a bill or law sooner or later. The payday loan industry (for obvious reasons) typically fights against such measures, and are a good indicator for private citizens to receive knowledge and information as to when such a law or ballot measure is coming up again.