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Payday lenders in some states can charge nearly 400 percent annualized interest (including fees) on two-week loans. Many people get stuck in a cycle of debt where they need to continuously take out new payday loans to get by.
The federal government has been watching the industry for the past couple of years, looking for ways to protect consumers. The Consumer Financial Protection Bureau recently found that payday borrowers are stuck in debt for an average of 55 percent of the year. The agency has the authority to create new regulations, such as requiring a waiting period between loans.
But payday lenders may have found a way to pre-emptively sidestep regulation, Bloomberg says. They could instead offer higher-dollar, longer-term installment loans. While traditional payday loans are usually secured by a postdated check, these would require scheduled payments.
Some companies are already using them, or trying to, Bloomberg says. For instance, in the state of Washington:
State lawmakers are debating proposals backed by MoneyTree Inc., a Seattle-based payday lender, to authorize installment loans for as much as $2,000 at a 36 percent annual interest rate. The legislation also would permit origination fees and monthly maintenance fees that could push the effective annual rate above 200 percent, according to a calculation by the state Department of Financial Institutions.
That rate is better than many traditional payday loans, but it may not be good enough. Payday industry lawyer Jeremy Rosenblum admitted to Bloomberg that switching to installment loans “isn’t a perfect solution” because the government could still claim oversight over them.
“If small-dollar lenders are engaged in unfair, deceptive or abusive practices, the bureau will hold those institutions accountable, no matter how their products are structured,” CFPB spokeswoman Moira Vahey told Bloomberg.