Families save billions as Ohio joins 14 states and DC in rejecting predatory payday lending


Center for Responsible Lending
June 2, 2008

One third of the nation's population will soon be free of a practice that has stripped billions per year from the paychecks of low-wealth Americans over the past two decades, as Governor Ted Strickland signs a law today capping interest rates at 28 percent in Ohio. Enforcement of a two-digit rate will save citizens $1.74 billion per year in fifteen states plus the District of Columbia, where 33 percent of the US population lives. Just a year ago, only about 20 percent of citizens lived in payday lending-free zones.

In a faltering economy marked by debt saturation, payday lending threatens to further rock the finances of people struggling to meet their obligations. Payday lenders draw in borrowers who need cash before their next payday, and charge them annual interest of about 400 percent, or $50 every two weeks for a $300 loan. Most borrowers cannot pay back their loan the first time and walk away, as the terms are designed to trigger expensive repeat borrowing. The average borrower has nine loans per year, amounting to about $450 in interest for a $300 loan, repeatedly closed out and re-opened.

"Payday loans trap borrowers—it's that simple," said Uriah King, policy analyst with the Center for Responsible Lending. "Even the payday lenders admit they need their customers to re-open their loans many times at these astronomical interest rates just for their business to survive."

"We're all for good, responsible credit," said King. "It's just got to be done without basing your business model on gouging low-income borrowers."

Ohio joins Arkansas, New Hampshire, Oregon and the District of Columbia in actions enforcing a two-digit interest rate since Congress capped interest at 36 percent for payday and car title loans to military families last year. The Pentagon had reported that predatory payday lending was threatening not only the quality of life of military families but the combat readiness of its servicemen and women.

Payday lending took hold in the late 1980's and quickly swept across the country as lobbyists for the industry convinced state legislatures that their two-week loan product should be exempt from annual interest rate limits. Now advocates and policymakers are increasingly coming to understand that the two-week loan is a myth. The industry relies on repeat loans going to borrowers caught in a cycle of debt for 90 percent of its revenue, and the loan terms are designed to keep that cycle going.

Republican and Democrat leaders in Congress and states across the country have joined military, faith-based, business and civic groups in advocating for a reasonable limit on interest rates. The industry promotes measures that appear to reform their practices, but have proven to be ineffective in decreasing the rate of borrowers caught in a debt trap in state after state. The two-digit interest rate cap stops predatory lending while leaving room for responsible lenders to offer cheaper consumer loans.

In addition to the aforementioned states, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia enforce two-digit interest rate caps. 

For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.