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The Controversy Over Capping Interest Rates

There is a debate at both the federal and state levels about payday loans and how capping interest rates might benefit the borrower. Of course, the debate is usually played out in good guy/bad guy terms, where lenders usually end up looking like they’re the ones in the black (bad guy) hats.

But this debate thus far nets out with no interest rate caps (on the federal level) and various rules – some loose, some strict – that vary by state. This is due in part to the argument that individual borrowers of payday loans can look out for themselves. In fact, millions of hardworking people use payday loans as a short-term fix for short-term money problems. To legislate away this option might drive them to find money in other ways, or to default on their obligations – none of this good for the economy overall.

Instead of blocking payday loan companies from doing business, as might be the case with an interest rate cap, more nuanced proposals for payday loan regulations have wisely suggested these measures instead:

  • Clear, transparent understanding of the loan terms: Eliminating confusing language, the payday loan company should provide direct, simple information on what the loan will cost the borrow under different payback schedules.
  • Understand where borrowing and expenses fit into your life: Sometimes referred to as financial literacy, this is part of a broader effort to help people see where credit cards, credit scores, car loans, home loans and payday loans impact their wallet. Smarter decisions early in the game can make everything else work better down the road.
  • Continue to make payday loans available to working people: Because traditional lenders (banks, auto finance and credit card companies) are very restricted by the current economy, payday loans made responsibly can be a lifeline to borrowers.

A good debate takes all creative solutions into consideration. This is an area where that is vitally important and very needed.