The Louisiana Installment Loan Act (House Bill 501/Senate Bill 365) would expand the payday loan industry in Louisiana by allowing payday lenders and car title lenders to offer longer-term “installment loans.” Installment loans are similar to high-interest payday loans, but allow borrowers to take out larger loans for longer periods of time. The installment loans would not replace existing payday loans, but would be an entirely new product with high costs for consumers that create an even greater risk that borrowers will get caught in the predatory lending debt trap.
Payday lenders in Louisiana currently make high-interest loans of $50 to $350 that must be repaid within 60 days. The proposed bills would also allow loans from $500 to $1,500, with repayment periods lasting from 6 months to 1 year. The Center for Responsible Lending calculates that a $500 loan, repayable over six months, would carry a 245 percent annual percentage rate (APR), when all fees are included. For a $1,000 loan due in 12 months, payday lenders would collect more than double what they lend.
Similar legislation has been introduced in several other states as part of a national effort by payday lending chains to circumvent new federal regulations on short-term payday loans. In 2017, the federal Consumer Financial Protection Bureau (CFPB) finalized a comprehensive set of payday lending rules that are scheduled to take effect in August 2019. The new rules are require payday lenders to actually verify whether a borrower has the ability to repay their loan without defaulting on other expenses. Longer-term installment loans would not be subject to the CFPB regulations.
The payday loan industry already thrives in Louisiana. There are four times as many payday lending storefronts than McDonald’s in the state, one lender for every 4,800 residents. The nearly 1,000 payday lenders in Louisiana are highly concentrated in low-income and minority neighborhoods, where residents often do not have easy access to banks and credit unions.
The predatory lending industry acknowledges that few people are able to pay within the terms of the loan, which begins the cycle of debt for more than 80 percent of borrowers. The industry collects $241 million annually in fees from low-income consumers in Louisiana, money that would otherwise be spent in neighborhood groceries, restaurants, and retailers. The harmful effects of predatory loans has led 15 states and the District of Columbia to effectively prohibit short-term payday loans by capping annual interest rates at 36 percent.
The Louisiana Installment Loan Act would move Louisiana in the wrong direction. Rather than helping working Louisianans to become more financially stable, installment loans would expand the ability of predatory lenders to trap them in a cycle of debt that can lead to closed accounts accounts and bankruptcy. Louisiana policymakers should be focused on ways to expand workers’ financial literacy, increase households earnings, and protect consumers from harmful financial products, rather than expanding them.
-by Carmen Green