Are Government APR Caps Eliminating Competition Among Payday Lenders?
Are Government APR Caps Eliminating Competition Among Payday Lenders? by Gabriel Rodriguez
A payday loan is generally defined as a short-term loan that is usually paid back on the borrowers next payday. These short-term loans (also commonly referred to as a payday advance loan) are offered at a higher APR which helps to offset the operating costs of providing a loan, usually to those with bad credit which leads to higher default rates when compared to traditional lending institutions. And although the payday lending industry argues that these higher APR are necessary to cover the operating and licensing costs associated with running a successful short-term lending business, the media often criticizes direct payday lenders for pushing so-called “predatory” lending rates, and many State regulations have already “capped” APR’s offered by these lenders to as low as 36% APR.
Recently some financial analysts from a payday loan resource have begun to criticize the effects of the APR caps in certain States that have already enacted an APR cap or have flat out banned these types of loans. A study of payday lending in Colorado has shown that shortly after an APR cap was put into action there was still a wide range of APR’s and loan products offered within the State regulatory laws, while a few years later 95% of Payday Lenders were offering the loans at only the “maximum” APR. Some are reading these figures as a sign that stricter regulation and ceilings on APR’s are in fact eliminating competition between lenders, so that they can all charge the same maximum finance rates. After all, when competition is eliminated it is usually the consumer who bears the burden of higher prices.