Starting today, new law gives payday borrowers a break

The new law governing payday loans takes effect today. It represents a significant change and should eliminate the two-week, triple-digit loans that trapped so many borrowers. Borrowers will save as much as 63 percent over the maximum charges allowed previously.

The new law sets the minimum loan term at six months. This will provide borrowers with a more reasonable period to repay loans. The law (HB 10-1351) did not explicitly lay out a process for installment payments but rather allowed the details to be negotiated between lenders and borrowers. However, the attorney general's office determined that installment payments must be in substantially equal amounts and due at equal intervals.

Borrowers have the right to repay the loans early without incurring a prepayment penalty. If they pay the loan off early, any interest charges will be refunded on a pro-rated basis. Monthly maintenance fees, which are allowed under the law, can be charged only for each month after the loan is outstanding for 30 days. This means there can be only five monthly maintenance fees on a six-month loan.

Taken together, the maximum total charges on a $500 six-month loan represent a 63 percent savings to borrowers over the previous law. Because some of the charges, such as the origination fee, are front-end loaded, the savings are lower if the loan is paid off early. For example, paying off the loan after 30 days results in a 38 percent savings, and paying it off after three months results in a 59 percent savings.

The law is fairly complicated, and we do not know exactly how the payday lending industry will market the loans under these new rules. However, it is critically important that borrowers be made aware that they have six months to repay loans. We and members of Coloradans for Payday Lending Reform will be monitoring this market closely and ask that anyone who experiences a problem with the loans contact us. We will report all violations to the attorney general's office, which oversees this industry and enforces the provisions of the law.

The attorney general proposed rules to implement the law, and they will be considered at a hearing on August 31.