Laws Intended to Regulate Payday Loans in Colorado Forces Many Lenders to Close

By: Javi Calderon
Laws Intended to Regulate Payday Loans in Colorado Forces Many Lenders to Close

Just last year, in May of 2010, the state of Colorado signed legislation that would regulate the payday loan industry out of fear that high interest rates were forcing consumers to take out subsequent loans. The new law set an interest rate cap at 45% APR and extended loan term limits to six months.

Changes did not take effect until November, and within six months half of the state’s payday lending stores are out of business. Also lost, over 400 jobs.

One high-ranking industry executive stated that Colorado killed off payday loans long before half the stores in the states closed. By extending the loan term limit, the exec argues, Colorado created a completely different financial product.

The Community Financial Services Association of America, which promotes and regulates responsible lending, requires its member lenders to offer payment plans for consumers who find themselves unable to repay their loan within the specified loan term.

Lenders are also required to be open and transparent about their fees. What consumers and politicians need to keep in mind is that the money paid by the consumer – though APR-wise it may seem excessive – does not go directly into the pocket of the storeowner. This goes towards processing the loan, paying employees, mortgage or rent, electricity, and all the other expenses of running a business.

Critics often argue that cash advance, and other short-term credit loans, are more expensive for the consumer than traditional bank or credit union options. What they forget is that most of these consumers don’t meet the credit requirements of banks and credit unions, and that the fees associated with payday loans are certainly cheaper than those incurred by missed credit card payments, mortgage payments, or utility bills.

In the long run, it is truly more beneficial for low-income consumers to have access to payday advance options. The key to regulation is finding the happy medium between protecting consumers and doing harm to the service provider.

Though they have noticed that the law may have had some unexpected ill effects, Colorado officials are still hesitant to make quick changes, siting the need for multiple six-month periods to be able to draw accurate conclusions.