The undersigned organizations ask for your support for SB 325, which establishes a 36 percent rate cap on small loans in Indiana, that are currently offered at rates of up to 391 APR. We also ask you to reject any bills establishing new loan products or expanding the allowable fees or interest on existing loan products if they exceed this 36 percent threshold.
The negative effects of high-cost loan products are well documented. A large body of research has demonstrated that high-cost loans create a long-term debt trap that drains consumers' bank accounts and causes significant financial harm, including delinquency and default, overdraft and non-sufficient funds fees, increased difficulty paying mortgages, rent, and other bills, loss of checking accounts and bankruptcy. Indiana currently has one of the highest bankruptcy rates in the country. The Indiana General Assembly is well positioned to strengthen consumer protections for Hoosier consumers and improve economic well-being by capping loans at 36 percent.
Thus far, provisions in the state's small loans statute, such as warning notices, renewal bans, and cooling off periods have been insufficient to adequately protect consumers. In Indiana, 60 percent of borrowers take out a new small loans the same day they repay their old loan. Within 30 days, 82 percent have re-borrowed. The average borrower takes out 8-10 loans per year, paying over $400 in interest to repeatedly borrow $300. These loans drain Indiana's economy of an estimated $70 million each year solely in abusive finance charges — a statewide issue in addition to the negative effects individuals may suffer from these products.
Approving a bill that caps APR at 36 percent is the most effective protection the state government can offer to all borrowers, especially payday borrowers. When payday lending was, effectively, banned in states that introduced rate cap bills of 36 percent or lower, former borrowers reported that their lives were, on average, better than when they had access to payday loans. Notable examples include North Carolina and Arkansas, which in 2006 and 2009 established 36 percent and 17 percent rate caps, respectively. Researchers studying the effects of the rate cap and the effective banning of payday lending in North Carolina concluded that the absence of storefront payday lending had "no significant impact on the availability of credit" among former borrowers. Further, former borrowers were twice as likely to report that they were better off without payday lending.
Given the harms incurred from taking out loans with high interest rates, fees, and costly but, largely, ineffective insurance products and the lack of evidence of harms incurred from the absence of such products, the Indiana General Assembly should reject the expansion of high-cost loan products in the state and approve SB 325. It should also reject any new proposals to establish credit products that exceed 36 percent APR inclusive of origination fees and insurance products.
For more information, please contact Erin Macey, Policy Analyst at Indiana Institute for Working Families at firstname.lastname@example.org or Kathleen Lara, Policy Director at Prosperity Indiana at email@example.com.