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Payday Lenders Resist APR Comparisons

How much are you really paying for that loan?

By Mark Huffman
ConsumerAffairs.com

June 24, 2009

Saying that a $200 loan, for two weeks, costs $30 sounds a whole lot better than 390 percent, which is what it is.

In their battle to win legal authority to charge triple-digit interest rates, payday lenders argue that stating their typical interest rate as 390 percent annually is misleading because their loans are short term.

State policy-makers and even voters have specifically rejected this argument but payday lenders are trying to use it again as the U.S. Congress debates how to stop what many consider widespread abuses in the payday industry.

A new brief from the Center for Responsible Lending — APR Matters — attacks that argument head-on. First, critics counter that the typical payday borrower is actually in debt long term, caught in a cycle of back-to-back transactions that end up costing several times more in interest than the original amount they borrowed.

But equally important is that the federal Truth in Lending Act requires that the interest rate charged on any type of credit be stated as an effective annual interest rate — even if the loan does not last a full year — so that borrowers can comparison shop when presented with loans carrying varying terms. Making comparison shopping easier protects consumers and promotes free-market competition.

Over the payday lending industry's objections, the Federal Reserve Board specifically ruled in 2000 that the Truth-in-Lending Act applies to payday loans. Despite that ruling, the industry still produces marketing and lobbying materials that claim APR is an inappropriate measure of the cost of payday loans. The Federal Reserve rejected that argument because, without a standard measure, the real cost of payday loans is masked.

"Telling policy makers you shouldn't have to abide by the APR disclosure because you only charge triple-digit interest for two weeks is like telling the officer who pulls you over that you were only driving 100 miles per hour for 2 minutes — not for the full hour," said Uriah King, a policy analyst for the Center for Responsible Lending. "It's bad logic and simply a way to try to justify abusive lending practices."

For example, take the $15 fee payday lenders typically charge for every $100 borrowed on a two-week loan and compare that with a cash advance on a credit card carrying an 18 percent annual percentage rate. A $300 payday loan at this price would cost a borrower $90 in interest over one month, compared with $4.50 in interest using the credit card.

That's quite a difference but one not readily apparent without the APR, a tool that for more than 40 years has let consumers see an apples-to-apples comparison of financial products.

"Payday lenders want Congress to let them charge triple-digit interest rates without making it clear that borrowers are paying many times the cost of other forms of credit," said King. "When they say their products cost 15 percent, they are not comparing an apple to an apple, or even an apple to an orange. They are comparing an apple to a worm."

The Center for Responsible Lending said it supports an APR cap of 36 percent as a quick and commonsense measure to protect consumers from triple-digit loans that trap borrowers in a cycle of long-term debt.

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