Washington Finds a Creative and Successful Way to Restrict Payday Loans
In an effort to protect their citizens, many states have made payday loans illegal to obtain. Borrowers get around these laws by finding loans from outside of their borders, but these illegal loans come with a hefty price tag. The Department of Financial Services recently found 35 illegal lenders providing loans to New Yorkers with interest rates as high as 1,095%. Washington took a different route to protect its consumers.
Back in 2010, Washington decided to restrict payday loans, not by banning them altogether but by putting a cap on how many loans a borrower can take out in a single year. Each person is limited to eight loans a year, which is sufficient for approximately two-thirds of typical loan recipients. The remaining one third that require nine loans a year or more contribute to two thirds of the profits that payday loan companies make very year. Thus by putting a cap on them, Washington is able to deliver a major blow to these lenders.
Government reports from 2011 indicate that 56,326 borrowers hit their 8 loan limit in the first year of the program, accounting for 24.09% of the borrowing population. While this is a significant percentage, it indicates that the majority of loan recipients have been unaffected by the restrictions. The banks, on the other hand, are suffering big losses in profits by losing some of their most loyal repeat customers.
Whether intentional or not, Washington saw a decrease in the number of complaints issued per year about payday lenders. The Department of Financial Institutions saw a steady increase in complaints prior to the limiting laws, going from 64 in 2005 to 324 in 2010. Then in 2011, the numbers dropped to 286, with 145 of those made about online lenders.
We cannot attribute this improvement to the loan restriction laws alone though. Part of the lack of complaints may be due to the fact that consumers are becoming more responsible with their money nowadays. Credit card delinquency rates recently hit a 19 year low, and many former debtors are starting to recover from the crash of 2008. Payday loans peaked in 2009 at $1.3 billion in Washington, but then they dropped to $327 million in 2011. People just don't need as much help now as they used to.
Washington has seen great success with their payday loan restriction laws, but that success may be partially due to a lucky choice of timing. Right as borrowers began to control their money, this state issued government regulations to control matters even further. Nevertheless, the signs indicate that this is a good move and one that other states may want to adopt in the future. It is changing the way people respond to their lending opportunities.