Dear Members of the Indiana General Assembly,
The undersigned organizations ask for your support to reestablish a 36 percent APR cap on small loans in Indiana. We also ask you to reject any legislation creating new loan products or expanding the allowable fees or interest on existing loan products if they exceed this 36 percent threshold. We ask that you allow a 36 percent rate only on small loans, with a lower rate for larger loans. The undersigned organizations implore the Indiana General Assembly to improve financial well-being and bolster our economy by implementing stronger consumer protections.
Since 2002, payday lenders have benefited from a carve-out to our state lending laws allowing them to charge up to 391 percent APR. The negative effects of high-cost loan products are well-documented. In the past five years, these lenders have drained over $300 million in excessive finance charges from Hoosier households and communities. 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.
So 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 loan the same day they repay their old loan. Within 30 days, 82 percent have re-borrowed. The average borrower makes just over $19,000 per year and takes out 8-10 loans per year, paying over $400 in interest to repeatedly borrow $300.
Approving legislation that caps APR at 36 percent is the most effective protection the state government can offer to all borrowers, especially payday borrowers. It is the rate the U.S. Department of Defense established when payday lenders were targeting military families, damaging readiness and morale. Many states have followed suit. In states that introduced rate cap bills of 36 percent or lower, former payday loan borrowers reported that their lives were 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 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.
Nearly 90 percent of Hoosier voters supports a 36 percent interest rate cap. By and large, they see these products as more harmful than helpful and a financial burden rather than financial relief. Seventy-five percent of voters would not want to see a payday loan store open in their community. Given the strong support for a rate cap, the harms incurred from taking out loans with high interest rates and fees and the economic benefits of the absence of such products, the Indiana General Assembly should reject the expansion of high-cost loan products in the state and approve a 36 percent APR rate cap on payday loans. It should also reject any new proposals to establish credit products that exceed 36% APR inclusive of origination fees and insurance products.
For more information, please contact Erin Macey, Senior Policy Analyst at Indiana Institute for Working Families at email@example.com
, Logan Charlesworth, Indiana Assets & Opportunity Network Manager at firstname.lastname@example.org
, or Kathleen Lara, Policy Director at Prosperity Indiana at email@example.com