Sep 05, 2013 Quinn Thomas
Short term lending practices have been in the scope of overzealous lawmakers across the United States. Many have cited the use of astronomical interest rates as viable reasons why small dollar operations should be shut down.
However, many of the statistics provided by industry critics are extremely misleading. The major benefit of short term loans is that they encompass relatively quick pay off periods, hence the short term label. Despite this fact, government officials continually use annualized rates to outline how dangerous these loan products are to consumers, which is a stretch to say the least.
An industry group stated that many regulators use the example of a 391 percent APR when arguing that the rates for short term loans are astronomical. That's based on the concept that a $100 advance loan comes with a fairly standard $15 fee. Extrapolated over the course of a year, that is indeed a 391 percent APR.
However, the length of short term loans are never intended to reach more than just a few months. In fact, the National Conference of State Legislatures indicated that 25 of the 38 states that have specific regulations on short term lending prohibit such loan periods from exceeding 60 days.
So why do government officials constantly use the APR-based argument as grounds to lobby for over-regulation of the short term industry?
APR model applied to other expenses
If a similar measurement was applied to a number of other financial consumer products, the APR would be considerably higher than that for a standard small dollar advance.
For example, a bounced $100 check may come with charges in excess of $50, much higher than the APR associated with a $100 sort term loan that comes with a $15 fee. The same applies to late utility bills and credit card payments that would feature APRs greater than 900 percent.
By applying APR analysis to short term rates, lawmakers are doing little more than adopting scare tactics. Like any financial product, small dollar loans are useful for consumers and businesses, as long as they use the funding in a responsible manner.
Instead of seeking to create hysteria among consumers about the use of these loans, government officials should focus their efforts on promoting financial education reform. Doing so would be beneficial for the national economy, unlike clamping down on short term loans that the Pew Charitable Trusts stated are used by about 12 million Americans annually.