By Mike Stetzer
Across the country, both elected officials and informal citizen groups are taking steps to stop abusive loan practices.
Two of the most notorious types of loans, payday and quick loans, were the recent targets of preventative action in two Western states.
This summer, Arizona became the seventeenth state to effectively ban payday loan lenders from operating within its borders.
Payday loans are small, 14-day cash advance loans with painfully large interest rates. Payday loan lenders usually serve low-income Americans, and they are offer instant cash in exchange for a post-dated check.
According a report on CNNMoney.com, Arizona recently capped the interest rates lenders could charge at 36 percent. Here’s how this change will drive payday lenders out of the state:
Due to this alarmingly high interest rate, Arizona acted in order to protect its most vulnerable borrowers. In response to similar trends in other areas, more states, including Montana, Mississippi, and Colorado, are considering passing similar laws.
In addition, the recent financial reform bill passed in Congress gives regulators more authority to govern the actions of payday lenders.
Another type of loan receiving negative press is the “quick” loan. A coalition of religious groups in Utah recently demanded that credit unions stop issuing these short-term loans, which operate similarly to payday loans.
According to the Associated Press, users of quick loans often cannot pay off their first loan in time, so they take out another loan to pay off the first, resulting in ever-increasing interest rates on a single loan.
In response to criticism, Utah credit unions claim that quick loans are typically offered at half the interest rate of payday loans. In addition, credit unions offer credit counseling and a savings plan when they give out short term loans.
Regardless of the relative merits of quick loans, the bottom line is that customers should be careful when taking out short-term, high-interest loans, in order to prevent racking up large debts that could lead to personal bankruptcy.