Payday loans at 185 percent APR: Reform slashes interest rate, but desperation remains

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Last year, when state lawmakers set about reining in the sky-high interest rates of payday lenders in Colorado, the industry howled and moaned that tighter regulation would cost bunches of jobs. But a new report from the Colorado Attorney General's Office suggests the biggest impact of the reform has been some savings to borrowers -- who are still struggling to pay off the loans in under three months.

According to the AG's count, the number of licensed payday lender locations in the state fell by 19 percent last year, and the number of loans issued dropped by nearly a third. But that still left more than 400 clip joints, issuing or taking over by assignment over a million loans in 2010, worth more than $400 million. Approximately fifteen percent of those loans, valued at about $68 million, ended in default -- a good indication of the high-risk nature of the transactions, which has been used to justify annual interest rates as high as 485 percent.

The good news in the report is that the average contracted annual percentage rate (APR) for the loans now stands at a mere 185 percent, compared to 326 percent in 2009. The bad news is that borrowers are taking much longer to pay back the average loan, so the financial cost of the transaction remains roughly the same. Prior to the new law taking effect, the average payday loan customer borrowed $369 for a contracted eighteen-day loan term and had to cough up $60 in charges. The customers are still borrowing approximately the same amount but contracting for much longer loan terms -- and paying off the loan, on average, 63 days later, which ends up costing around $60, too.

The full report is worth checking out for, among other things, the glimpse it provides of the thousands of financially strapped people in the state living from loan to loan. The vast majority of the state's 300,000 payday borrowers report that they had fewer than six such loans last year, but almost 50,000 Coloradans took out more than seven. And about 5500 desperate cases had thirteen or more.

In theory, these folks are saving thousands of dollars over what they would have been paying in juice under the old law. In practice, it doesn't appear that many of them are saving anything. They're just buying a little more time.

More from our Follow That Story archive: "A protest at Bank of America demands loan modifications and accountability."

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