On Friday, Colorado will severely restrict how much interest payday loan businesses can charge consumers — which could force all of them to close.
Voters made the change last November when they approved Proposition 111 by an overwhelming margin.
Colorado and 34 other states allow people to take payday loans. They’re often sold as a quick and easy way to get money for things like rent, or to pay bills, or to pay for other emergency expenses. Often, the very high interest rates trap people in a cycle of repayment. Colorado law changed in 2010 to restrict how lenders could operate, but high interest rates remained.
The average annual percentage rate on the loans was 129 percent. More than 200,000 people took these loans in Colorado in 2016 with more than $166 million loaned out. On Friday, all that changes.
The new law doesn’t outlaw the lenders, but it caps how much interest they can charge at 36 percent.
Alex Horowitz, senior officer with the nonpartisan Pew Charitable Trusts, said the new law will drive payday lenders out of business entirely.
“In 15 other states that have a similar law on the books, there are no payday loan stores,” Horowitz said. “There won’t be payday loans anymore in Colorado.”
Under current law, it costs about $120 for a consumer to borrow $400 for three months, he said. Under the new law, it will only cost them about $24.
“That’s not enough for lenders to earn a profit, so they’ll stop lending,” Horowitz said. Once they collect on any outstanding loans, expect them to close entirely shortly after the change.
So why will it be so difficult for payday lenders to stay open? They simply can’t lend enough money — by law, the loans are capped at $500 — and they have overhead costs that include storefronts and employees.
“The research is mixed on whether it’s better to eliminate lending like this or have it in a heavily regulated market with strong consumer protections like Colorado had prior to the ballot initiative,” he said. “Borrowers do things when loans are unavailable like use pawn shops or overdraft their checking accounts.”
Some people may be completely unable to borrow money at all, he said.
Not all such lending in the state has been outlawed, however. While auto title loans that borrow against the value of your car are illegal in Colorado, pawn shops may still loan money and charge interest. People will still need collateral in order to take money from a pawn shop. If people think they are going to just walk into their bank and get a loan like this, they are mistaken, Horowitz said
“At that price, banks and credit unions are not profitable either,” Horowitz said.
The backers of Proposition 111 have a new resource guide for consumers to find lower-cost options for borrowing money. The guide includes a list of groups and financial assistance programs to help people struggling financially. There are also links to credit unions and examples of credit cards that have lower interest rates than what payday lenders typically provide.