Payday lenders will not survive under that cap.
Los Angeles, CA (Vocus) July 20, 2010
According to a blog posting at Pay1Day Blog, the city council of Rocky Mount has proposed a resolution to an ongoing deliberation on the payday loan industry: either ban payday loans or cap them at 36% APR.
The resolution is called The Rocky Mount, it urges local and state law makers to address the issue with "high priority" in their next legislative session. This proposal also incites "strict" prohibition on payday loans, and other short term loans, or putting a 36% APR maximum cap on the industry.
According to a loan officer, whom works for a reputable payday loan company, "Payday lenders will not survive under that cap." He goes onto pronounce that APR rules should not apply to the payday loan industry, as they only offer short term loans.
Payday lenders like to refer to payday loan interests as fees. For example if you get a loan of $100, a lender, on average, will charge you a flat $15 fee and your loan balance will be due your next paycheck which is on average two weeks.
The are various reasons why payday loans are a bit more expensive than conventional loans, payday loan lenders deal with high risk customers that are approved without a credit check, in addition the industry also carries huge overhead and operating costs. The majority of payday loan lenders report millions of dollars in loss each year as a result from defaulted loans. Combine that with business fees, state and federal taxes, cost of operation, and the fact that these are short term and not long term loans, one will realize that they have no alternative but to charge such fees.
In an article on a payday loan resource blog, calculating 36% APR cap on a 2 week loan of $100 would gross the lender only $1.38. "There is NO WAY that a payday lender wants to give a loan to a high risk customer only to make a dollar and thirty eight cents. It wouldn’t cover operating expenses, even if every customer paid back their loans on time, every time," says the article.
Nevertheless, it seems that payday lending has become under increased pressure from both the Federal Government and Local /State legislators, without fully understanding the nature of business. Pay1Day, strongly believes that payday lenders had nothing to do with the recession of 2008 and should not be victims to over-regulation by the government. Limiting payday loans will only hurt the industry, if operating costs are too high then layoffs will ensue or even worse, the loss of a major financial sector.