Utah, true to its laissez-faire style of governance, lacks any meaningful protections against the excesses of payday lending institutions.
As a result, these lenders are able to — and no doubt choose to — charge outlandish fees to Utahns looking to borrow money and take out loans.
People who seek payday loans, which lending institutions charge exorbitantly high interest rates for in order to insulate themselves from the risk of such lending, are likely already in a desperate situation.
These loans only make matters worse for the individuals taking them out. In addition to taking on the financial burden of a multi-100 percent loan, the likely delinquencies can be reported to credit monitoring bureaus, rendering borrowers who default unable to obtain credit in the future for housing, cars or an education.
Because of the excessive lending rates, payday loan recipients are often caught in a cycle of jumping from one payday loan to the next, spiraling into an endless cycle of impossible-to-escape debt.
Nationally, more than three-fourths of payday loans are made to individuals who have received a payday loan within the past two weeks. It’s common practice for Utah’s payday lenders to charge rates in excess of 400 percent.
At such rates, if loans are not paid off immediately, default is inevitable and crushing. Defaults place a large burden on our state’s small claims courts, too, accounting for nearly 38 percent of small claims cases statewide and more than 62 percent in Utah County.
Although payday lenders have an ethically vacuous business model, they do serve a legitimate market service. Without legitimate payday lenders, black-market loansharking would be allowed to thrive. The aim should not be to eliminate the practice, but rather, to curb the excesses.
Payday lending is a high-risk venture. Without collateral, payday lenders assume a high level of risk without an opportunity to recoup the losses. Thus they should be allowed to charge interest rates by what are traditional standards of lending. However, they should not be able to charge any interest rate they please, as they are currently doing.
One of the only federal laws pertaining to payday lending prohibits charging more than 36 percent on a payday loan to active duty military personnel and their dependents.
This historical cap was considered a reasonable rate for small, risky loans. Before the Reagan Era of deregulation, nearly all states had some form of usury caps on payday loans, and most were below the 36 percent threshold.
Today, more than 70 percent of states still have a usury cap bellow this historical benchmark. Utah should join the ranks of states that put in place minimal restrictions to protect the financially fragile from economic exploitation and predatory lending.
The Legislature should put a 36 percent cap in place and allow lenders to charge a small loan origination fee. These minimal protections would reduce the probability of default, increase the probability of escape from the payday loan cycle for struggling individuals and decrease the burden on the state’s overloaded small claims courts.
Utah’s legislators have a responsibility to their citizens to institute common sense regulation to protect against vulturine lending practices.