Predatory Loans Have No Place in State Policy

After battling the payday loan industry for three years, the General Assembly finally gained some ground last year. The legislature passed a law that reduced the number of loans borrowers could take out annually.

Sadly, for those who are least able to pay, the lawmakers wouldn’t go so far as to cap interest rates on those loans at 36 percent. That’s the maximum allowed for banks and other lending institutions in Virginia.

While those payday lenders continue to charge as much as 360 percent interest — or more on an annual basis — another form of loan has crept onto the landscape to separate those in dire financial straits from their automobiles. They are car title loans and interest rates on them can rise to an annul rate approaching 360 percent.

Both payday lenders and the outfits making car title loans operate in Virginia under the open-end credit law. That law currently allows companies to charge anything they wish as long as they don’t require any payment for the first 25 days. Payday lenders, in fact, recently began offering such loans to get around new restrictions that reduced the number of loans they could make to borrowers on an annual basis.

Sen. Mark Herring, D-Loudoun, has offered a measure that would crack down on car title lenders and tighten controls on payday lenders. His bill would require any company making loans under Virginia’s open-end credit law to charge no more than 36 percent annual interest.

That’s a move toward a cap of 36 percent on loans in Virginia. Period. The bill would end the usurious interest rates currently being charged by the payday and car title loan folks. The Assembly has been a little too coy with these folks in the past years. It’s time to quit playing games with them and do the right thing for all Virginians.

Car title loans usually work like this: A borrower gives the title to his vehicle and a copy of its keys to a lender in exchange for a loan of up to about half the car’s wholesale value. Typically the loans are less than $1,000.

The borrower agrees to pay the loan plus triple-digit annual interest and other fees. Often, he must pay back the loan in a month or two. If the borrower falls behind, he could lose his car, which is more often than not the family’s only means of transportation.

Here’s an example of a car title loan’s usurious repayment schedule. Making the minimum payments for two and a half months on a $400 loan, the borrower would have paid $374 and still owe $300.

There’s nothing unreasonable about the imposition of a 36 percent cap on interest rates on the car title lenders in Virginia. The Assembly tried and failed to reach such a cap for payday lenders, who would fall under Herring’s bill this time around.

Herring’s bill says that if payday lenders get into open-end loans, they can charge no more than 36 percent interest. Other legislators have offered bills that would prevent payday lenders from getting into open-end loans at all. That would still leave them charging as much as 360 percent annual interest for a line of credit up to $750.

The General Assembly can eliminate this predatory lending practice by approving Herring’s bill that would regulate car title loan businesses under the state’s Consumer Finance Act by limiting annualized interest rates to 36 percent. That’s the same rate charged by the other two dozen companies in the state that offer unsecured loans.

“All we want is for them to play by the same rules as other businesses that offer small loans,” LaTonya Reed, of the Virginia Interfaith Center for Public Policy, has said.

Why should those on the low end of the socio-economic ladder have to pay interest rates that run 10 times more than rates charged by other loan companies? They shouldn’t. It’s time for the General Assembly to make it clear that usury has no place in Virginia’s public policy.