How Effective Has Colorado Payday Loan Legislation Been Really

Colorado has seen an interesting trend in payday lending.  Payday lenders in the state dropped more than 14 percent, and the number of loans made by these lenders saw a decrease of close to 60%.  The annual analysis of subprime lending done by the attorney general highlighted the decrease, claiming it was a direct result of legislation passed in 2010.  The legislation the attorney general is referring to limited the dollar amount of payday loans as well as the interest that could be charged on them.

The Denver Democrat that sponsored the law, Mark Ferrandino, claims the law is working as intended to help Colorado workers that are vulnerable to the predatory lending practices often associated with payday loans.  They can find a service provider if needed, but consumers are no longer routinely ensnared in a major web of debt by payday lenders. Another reason for the decrease, not as widely touted, is the increase in unemployment in Colorado.  Payday loans are restricted to those that have a job.

The most interesting part of the trend however, is the fact that despite the decrease in payday loans, there was a sharp increase in small-installment loans.  The increase was as much as 180%, which was quite drastic, but understandable if you consider the difference between the two types of loans.  For example, payday loans are capped at $500 and have a repayment term increased to 6 months from two weeks.  They also carry with them interest rates that can work out to be as high as 159% annually.

Alternatively, small-installment loans can be taken out for as much as $1,000, have terms ranging from 90 days to a year, and interest of generally around 10%.  The choice is clear for most. Despite the jump though, payday loan use still overshadows small-installment loans 70 to 1.

The fact that they are still that much ahead is amazing when you look at the numbers.  Payday loans average around $375 with average finance charges of $237.  The contrast of the average $380 small-installment loan with $80 in finance charges is sharp.   Of course there is also the fact that in the state of Colorado there were only 5 companies licensed to make small-installment loans last year, the year used in the study.

What is the moral of this story?  Consumer advocates can celebrate a victory in the idea that legislation meant to regulate payday loans is working as intended, but the fact that other issues played a huge factor in the decrease cannot be ignored.  It may be a step in the right direction, but how big of a step remains to be seen.

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