Payday loans are high-interest, short-term loans that are most commonly used in low-income communities. Because high interest rates (often above 500% annually) can easily cause a person’s debt load to get out of hand, restricting the payday loan industry has become increasingly common in legislatures across the country. There are currently two bills that propose to further regulate the payday loan industry in Missouri, HB 1942 and HB 1881. These bills may be well intended, but legislatures should be careful lest they harm those they are trying to help.
Take for example the provisions of HB 1942, which would limit the annual interest on a payday loan to 36%. That may sound like a high limit to many, but remember that payday loans are not secured, meaning they are not backed by a car or a house or something else the lender can repossess if the person who takes the loan doesn’t pay up. They’re like personal loans from banks, which don’t come cheap. According to the Federal Reserve, the average personal loan interest rate is around 10%. For those without good credit, the rate approaches 30%.
Capping interest rates might sound like a good idea—sticking it to lenders and helping out regular people. But the people who take out payday loans are often those who would not qualify for a loan at 36% interest. Thus, a bill like HB 1942 would protect these people from high interest rates by cutting off their access to credit entirely. If someone’s car breaks down or they have a medical emergency and they need cash fast, telling them they should have saved more or joined a credit union six months ago will be cold comfort.
See former policy analyst David Stokes talk about payday lending in this Show-Me Institute video.
