Payday lending reforms working, saving money for consumers
A recent report by the Colorado Attorney General's Office on payday lending provides strong evidence that reforms enacted by the legislature in 2010 are working. Data for the last five months of the year – the period the reforms were in effect – suggest borrowers are paying much lower effective interest rates and are largely avoiding the cycle of debt that trapped many of them under the previous rules. The result is that low-income borrowers as a whole are saving tens of millions of dollars a year – money that now will stay in the community and help families meet basic needs.
Data in the report clearly show that the 2010 reforms have reduced the cost and annual percentage rate (APR) for payday loans. It also shows that, on average, consumers are paying $61 to borrow $368 for 64 days. This results in an APR per loan of 95 percent. While still expensive, this is a vast improvement over the old loans, which had an average APR of 326 percent.
The report, issued last week, also shows that by blocking legislation last session that would have eliminated the requirement that finance charges be pro-rated when loans are paid off early, lawmakers saved borrowers an average of about $40 per loan, for an estimated total of $22.6 million in consumer savings.
The report is a compilation of data submitted by all the payday lenders in the state and covers the period Jan. 1-Dec. 31, 2010. Because reforms adopted during the 2010 legislative session took effect on August 11, 2010, the attorney general reports data both pre- and post-August 11.
The report shows that before the reforms went into effect, the average payday customer borrowed $369 for 18 days and paid $60 per loan, resulting in an average APR of 326 percent.
After August 11, the amount borrowed remained about the same, at $368, but other aspects changed dramatically. The attorney general reports that average contracted finance charges, including interest and maintenance fees, totaled $229, with an average term of 187 days. This results in a contracted average APR of 186 percent.
The contracted fees and APR are based on the minimum six-month loan term set by law.
However, borrowers are paying off the loans sooner than contracted – after 64 days, on average. Because all finance charges are refunded on a pro-rated basis and maintenance fees can be charged only every full month after the first month, the average actual cost per loan is $61, resulting in an average actual APR of 95 percent.
Under the previous law, consumers would have paid $60 every 18 days, for a total of $240, to borrow $368 for 64 days. The reforms cut these costs by 74 percent and provide borrowers with some breathing room to save enough money to pay off the loans.
If the finance charges were not refundable – a change the payday lenders and their legislative allies wanted to enact last session – the average cost to borrowers would total $100 and the average APR would be 157 percent.