When it comes to the payday lending industry in Idaho, Republican Senator Lee Heider has done what he can to protect consumers and help them stay out of the debt cycles that are all too common with short-term loans. While there is still work to be done, he has at least made progress.
Here’s how payday loans work in Idaho
The Payday Loan Process
For consumers in need of fast cash, payday loans are often the fastest option. The payday loan process is as follows:
1. The consumer goes to the payday loan company’s office and fills out brief paperwork.
2. As long as the consumer has a job and a bank account, the payday loan company will approve them for a loan.
3. The payday loan company lends the consumer their desired amount.
4. The consumer writes the payday loan company a check for the loan plus the finance charge.
5. The payday loan company waits until the next pay period, typically two weeks, and then cashes the consumer’s check.
The payday loan company doesn’t run a credit check on consumers and the entire process hardly ever takes longer than an hour. Because of this, payday loan companies get quite a few low-income borrowers and they need money to cover an emergency.
The Dangers of Payday Loans
So, what’s the problem with the payday lending industry? It all comes down to the interest rates on payday loans, which are astoundingly high. For comparison’s sake, a high-interest credit card or loan could have an interest rate of 36 percent. The average interest rate on payday loans in Idaho are 582 percent. That’s the highest in the nation, but it’s not like Idaho is an outlier here. In states where payday loans are legal, interest rates are almost always extremely high, unless there are laws preventing it.
Let’s say you get a payday loan for $1,000. At that interest rate of 582 percent, you’ll need to pay $242.50 in interest after the first two weeks, meaning you’ll write the lender a check for $1,242.50. One of two things would typically happen in Idaho after that. The lender would try to cash the check, but the consumer didn’t have the money and would get hit with overdraft penalties. Lenders often would try to cash checks several times resulting in more fees for the consumer.
Or, the consumer refinances their loan with the lender. The standard method of refinancing a payday loan is paying the interest and starting up a new term. The problem with this is you then need to pay more interest for that new term, putting you in the same position as before. The Idaho Payday Loan Act does put a limit to renewals on payday loans, capping them at three before the loan must be paid in full.
Changes to the Idaho Payday Loan Act
As of July 1, 2014, changes went into effect for the Idaho Payday Loan Act. Senator Heider sponsored Senate Bill 1314, which contained several provisions designed to protect consumers.
It started by putting a cap on the amount that payday loan companies could lend to consumers. The maximum amount for a payday loan is now 25 percent of the borrower’s gross monthly income or $1,000, whichever is lower. This ensures that consumers don’t borrow more than they can afford to pay back.
To keep consumers from getting hit with overdraft fee after overdraft fee, the bill stipulates that lenders can initial present the check once, and then present it again two more times should the loan still be unpaid.
To prevent consumers from ending up in a cycle of debt, the bill requires that lenders offer extended payment plans for consumers who request them. These payment plans give consumers the opportunity to repay a payday loan over 60 days in four equal payments without any extra fees. However, consumers can only request this for one payday loan every 12 months.
Finally, the bill requires payday loan companies to include a disclosure in 12-point bold, capitalized font. There are six disclosures that lenders must provide to all consumers. This ensures that consumers are fully informed regarding how payday loans work and their rights.
Interest Rates Are Still an Issue
The obvious omission from Senate Bill 1314 is anything related to payday loan interest rates, which can still be as high as the lender wants. That has led to some criticism that the bill doesn’t offer much in the way of protection that wasn’t already part of the Idaho Payday Loan Act.
Idaho Community Action executive director Terri Sterling says that consumers are still vulnerable and advocates for a 36-percent interest rate limit on payday loans. It would seem that this limit allows payday lenders to continue to make money while retaining a competitive advantage over other lenders that take longer to approve borrowers for loans. Of course, the payday lending industry always pushes back against anything that threatens its profits, and 36-percent interest is quite a bit smaller than 582-percent interest.
The good news is that more traditional lenders in Idaho have started offering short-term loans of their own with interest rates starting at 15 percent. This gives consumers who would have previously turned to payday loans another option.
The Future of Payday Lending in Idaho
Right now, the payday lending industry is still thriving in Idaho due to those high interest rates. While the consumer protections of Senate Bill 1314 help, they don’t solve the dangers of payday loans, and it’s a bit like putting a band-aid on a broken arm.
If Idaho ends up capping short-term loan interest rates in the future, expect to see many payday loan companies leave the state. That’s what has happened in several other states that passed laws establishing interest rate limits for short-term loans.