Payday Lenders Leave Montana

By: Javi Calderon
Payday Lenders Leave Montana

As of the first day of 2011 the State of Montana will enact new regulations on payday loans that has had deferred deposit lenders packing their bags since the vote was passed in early November. The new restrictions will cap the interest rate payday loan lenders can charge at annual percentage rate of 36%.

An annual percentage rate calculates the interest of a loan as if it were a year-long loan. These numbers tend to be misleading as payday loans are typically no longer than a month long. Compounded interest rates therefore lead to more gaudy and offensive looking interest rates. 36% APR, in fact, actually limits lenders to a fee of less than $1.50 per $100 lent. At this rate the loan is not even profitable for the lender, thus effectively spelling the end for payday lenders in Montana. Most loans charge an interest of $15-20 per $100 lent.

In Missoula alone 70% of payday lenders have already boarded up their stores. The state of Montana had over 113 cash advance lenders before the initiative passed. Montana has become the 17th state to all but outlaw payday loans.

While proponents of the new legislation argue that cash advance loans prey on the poor and elderly, objective experts point out that eliminating payday advance loans only restricts the access to short-term credit for subprime borrowers.

Supporters claim that payday loans are “usury” because of outlandish interest rates, however, interest rates only become unbearable if the borrower rolls over the loan into another period. Just like with any financial product, the borrower must be responsible in their use of the loan. A borrower should be certain that they can pay back the loan before they sign for it, and be aware of all the fine print and stipulations regarding their loan.

Credit cards, mortgages, traditional loans - all of these financial products can be devastating to a person’s financial life if they misuse them, and rarely do legislators come to the aid of the individuals who do.

Payday loans have found a niche as a short-term money solution for people with poor credit. In these years after the U.S. economy nearly collapsed credit is hard to come by, and payday loans have become a reasonable option to avoid hefty bank fees and past-due bills. By passing laws to prohibit payday loans, law makers are making life harder for thousands of payday loan customers to save a few irresponsible ones.

Critics of payday loans point to Credit Unions, claiming they provide similar services, yet failing to mention that these credit unions have criteria for a borrower’s credit score. Many payday loan customers are subprime borrowers who would also be denied by credit unions.

Low income subprime borrowers in Montana will now how to look else ware for financial help when unexpected expenses arise.