Payday loans Colorado should end predatory lending

Perhaps as early as Monday, Colorado legislators can expect to see a bill to begin the process of reining in payday loans. The bill will likely ask lawmakers to approve a referred measure that would ask voters to apply the state's existing interest cap of 36 percent to payday loans. Payday loans are now exempt from the state's usury law.

The Legislature should approve the bill and let voters choose whether to end this predatory lending.

Payday loans are small loans that are secured by the borrower's personal check. The full amount, plus fees, is to be paid back in two weeks.

Colorado law now limits payday loans to $500. Finance fees can be no more than 20 percent of the first $300 and 7.5 percent of any amount above that, with a cap of $75.

The group Coloradans for Payday Lending Reform says the fees paid work out to an average annual percentage rate of 318 percent and can be as high as 521 percent. It cites the Colorado attorney general's office as saying the average payday borrower "rolls over" or takes out the same loan six times before paying off the original amount. As a result, "in 2007, the average borrower paid $573 to take out a $354 loan."

The group's description of a typical borrower's situation is bleak. Almost half such loans went to someone who had taken out 16 or more loans in the last year. More than two-thirds of payday loan were refinanced loans or taken out the same day another loan was paid off.

These are people with jobs. But they are obviously desperate, living paycheck to paycheck and loan to loan. Economically already on the edge, they are the people least able to afford outrageous finance charges.

Interest rates of 300 to 500 percent are the kind of charges usually associated with enterprise in which late-payment fees involve broken legs. And Coloradans for Payday Lending Reform says the state has more payday loan locations than Starbucks and McDonalds combined.

Payday loans in Colorado totaled $639 million in 2007, with interest and fees of $80 million. That is $80 million taken out of the state's economy. That money was not spent with local merchants, given to churches or charities or saved for college tuition or a car.

The payday loan industry claims its exorbitant charges are necessary because of the high risk of the loans it makes. But figures from the attorney general's office show the actual rate of payday loans that had to be written off is slightly lower than that for credit cards.

Nor does the experience of other states suggest that limiting fees cuts into working people's access to credit. Oregon capped interest at 36 percent, and while many payday lenders closed shop, the state's credit unions came up with new, small loan products that filled the gap - at 18 percent APR. Credit unions in Pennsylvania took similar steps, as have those in Ohio and North Carolina.

Several Colorado credit unions and nonprofits are already developing alternatives to payday loans with reasonable terms. Some include courses in financial education.

Nor should lenders find a 36 percent cap onerous. The Department of Defense already mandates a 36 percent interest limit for all loans to military personnel. And credit card companies do just fine with less.

The Legislature should give voters the opportunity to reform payday loans - and give working families a break.