A recent hearing in the U.S. House of Representatives addressed legislation requiring banks and credit unions to calculate overdraft protection fees as an annual percentage rate (APR) under the Truth in Lending Act (TILA). Bank and credit union officials testified that APR was not an accurate measurement of short-term credit.

Kenneth J. Clayton, American Bankers Association (ABA):

“Any time an annual percentage rate is calculated for a term less than a year, the inclusion of a fixed fee, even a modest one, will distort and overstate the APR. The shorter the repayment period, the greater the APR will appear in instances where there is a fixed fee. This means that the sooner the consumer repays, the greater the calculated APR – a difficult concept to explain to consumers, as it appears that paying earlier actually increases the cost of credit.”

Read more excerpts

In a LTE, Laura Polacheck of AARP Utah wrongly claims that “ All forms of credit are required to post an annual percentage rate so consumers can compare the rate at which interest is being charged.”  This, in fact, is far from the truth.   

If asked, consumers don’t care what it would cost them to have a payday loan for an entire year.  They want to know what they will actually pay, what the total cost will be out of their pocket for the term of the loan, not some hypothetical percentage.  All of the research shows that consumers do compare the alternatives and do make educated decisions on which short-term credit products to use. 

Thanks to David Martin for the hat tip to this great post from the NaugBlog’s Matt Naugle on payday lending legislation in Ohio.

391% is VERY misleading, as pay-day loans are supposed to be PAY-DAY LOANS… Which means an advance on a paycheck from an employer in two weeks. The actual interest rate is 15% (Get out your calculator: $15 is 15% of $100), which is quite reasonable, especially when you consider the risk these companies are taking by giving money to people who need short term loans.

So what will the legislature and Governor do by passing this law? They will decrease the availability of payday loans, which will put more hardships on working class people who might have an emergency need for a short term loan. So this will encourage more use of credit-cards and possibility bouncing checks, both options include hefty late-fees and serious fines.

This is just another example of the growth of the nanny state. The legislature needs to keep it’s grubby hands off of the payday lending industry and stop making more decisions for consumers. People, and not government, should be trusted to know what each person’s financial situation is and people who take out payday loans clearly know they are only for short term emergencies and understand the cost of delaying payment.

And if this law really puts 1,600 stores out of business, then this is one more example of Ohio’s government making Ohio’s business climate more unhealthy than it already is. Maybe if they would stop passing so many stupid laws, then more Ohioans could have better paying jobs and avoid short term emergency loans in the first place?

…compared to bounced check fees and overdraft protection.  The payday lending industry has been making this point for years, but now economists are catching up.  This article on the blog of the Left-wing magazine Mother Jones discusses research by East Carolina University Professor Marc Anthony Fusaro.   

From the article:

     Fusaro looked at overdraft protection as a form of a short-term loan and found that people who occasionally bounce checks (between 1 and 10 times a year) pay interest rates exceeding 6,000 percent. Chronic bouncers in the study, who make up a small percentage of bank customers, paid more than $3,000 in fees annually for the privilege. The average size of the overdraft was pretty small, between $90 and $300. The most extreme case in the study was one poor soul who had a $3 overdraft outstanding for one day, which resulted in an intereste rate of 260,245 percent, a hefty surcharge for using a debt card for a latte.

Justin Hauke of the Show-Me Institute provided some interesting numbers yesterday on payday loans in Missouri. Hauke’s numbers highlight that despite triple-digit annual interest rates which people commonly cite, customers only pay a fraction of that in fees. What’s more:

Before readers are outraged at the interest rates being charged on such loans, it’s worth considering the annual interest charged on other consumer products. The perfect example is late fees on video rentals. For example, despite the fact that Blockbuster advertises a “no late fee” policy, the company in fact charges a $1.50 restocking fee for rentals more than eight days past due. If you consider an average rental cost of $5, this restocking fee would translate into a simple interest rate of 1,369 percent if expressed as an annual rate (assuming no compounding). But nobody accuses Blockbuster of being usurious.

Just some food for thought.