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Pay Day Loans – Legislating Rates

The payday loan industry is enormous at over 85 billion dollars. In 2008 the state of Ohio passed legislation limiting the interest rate to 28% for businesses offering payday advance loans. This puts the interest rate at close to the same rate as a credit card. The state supported this bill by 64%. Proponents of the bill noted that payday loans cause the poor to get caught in a vicious cycle of debt that they cannot escape.

The interest rates on these types of loans ranges from 300% -600%. It is also important to understand the amount of risk involved with this type of transaction for the person lending the money. Given the size of the industry it would seem that there is plenty of profit motive to enter the market and that someone would lend at a lower percentage to pick up more business. However, the only thing to factor in must be the size of risk involved. More innovative online pay day lenders such as those that offer no fax payday loan have actually decided to stop lending in Ohio due to the new legislation.

This limits choice for Ohioans and others in States that limit pay day interest rates. Some have suggested that state level assistance programs may be necessary in the absence of this form of credit.

I’m interested to hear your thoughts on the subject. Leave a comment and let me know what you think. Does the new legislation protect those who would otherwise be taken advantage of or is this a necessary service that people depend on that will no longer be an option?

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