Americans from all walks of life use payday loans and property titles, and they typically do so to cover recurring expenses such as rent, mortgage payments, groceries, and utilities, rather than unexpected expenses.1 Only a checking account and verifiable income are needed to get a payday loan;2 Clear title to a vehicle is generally required to obtain a title loan.
Lenders make these loans to hundreds of thousands of Virginians every year. And this high-cost credit comes with some of the most lax borrower protections in the country, as in-state lenders can grant loans under any of four laws, two of which allow unlimited interest rates.3 (See Table 1.) As a result, residents of Virginia pay up to three times more for this type of credit than borrowers in other states, even those who get loans from the same companies.4
Other states, like Colorado and Ohio, have modernized small loan laws to make credit more affordable while keeping it widely available.5 Virginia could follow their lead to better protect borrowers from damaging loan terms. (See Table 2.)
Payday loans and title loans hurt Virginians
Virginia’s small loan laws have unusually weak consumer protections, compared to most other laws in the country. As a result, Virginia borrowers often pay more than residents of other states for loans and suffer adverse consequences, such as repossession of vehicles and fees and interest that exceed the amount they received on credit. .
- 1 in 8 title loan borrowers in Virginia has a repossessed vehicle each year, one of the highest rates in the country.6
- Lenders sell 79% of repossessed vehicles in the state because borrowers cannot afford to collect them.7
- Many lenders operate unlicensed stores and online in Virginia, issuing lines of credit similar to credit cards, but with interest rates often 299% or more, plus fees.8
- Virginia is one of 11 states that does not have a cap on interest rates for installment loans over $ 2,500.9
- Virginia has no interest rate limit on lines of credit and is one of six states where payday lenders use such an unrestricted line of credit law.ten
- Virginia laws allow lenders to charge Virginians up to three times as much as customers in other states for the same type of loans.11
- More than 90 percent of the state’s more than 650 payday and securities lending stores are owned by companies located outside of the state.12
Virginia can balance affordability and access to credit by modernizing its small loan laws
In 2018, Ohio lawmakers replaced harmful payday loans and title deeds with affordable installment credit at lower prices. Estimates of the resulting savings for Ohio families exceed $ 75 million per year, which goes back into the state’s economy.13 And access to credit remains widely available in Ohio from hundreds of approved providers, with new competition from lower-cost lenders.14
The Ohio Equity in Loans Act of 2018 requires lenders to give borrowers enough time to repay in equal installments, with payments making up only a small portion of borrowers’ paychecks.15 By law, any loan issued in violation of state law, whether issued online or in-store, is null, void, and uncollectible, and the Attorney General is empowered to enforce this provision.
In Colorado, similar reforms, passed in 2010, have yielded proportionate results, with lower prices, affordable payments, and reasonable repayment terms.16 State stores have doubled their efficiency, to about 1,100 unique borrowers per year.17
Borrowers in these states and others with sane small loan laws have not turned in large numbers to unlicensed lenders.18
With cautious reforms like those in Ohio and Colorado, policymakers in Virginia can lower costs for their constituents, creating an affordable price for borrowers and a viable market for lenders, including lower-cost providers. who currently avoid operating in the state due to its outdated laws,19 and saving families over $ 100 million a year.20
- The Pew Charitable Trusts, “Payday Loans in America: Who Borrows, Where They Borrow, and Why” (2012), https://www.pewtrusts.org/en/research-and-analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why.
- The Pew Charitable Trusts, “Payday Loans in America: How Borrowers Select and Repay Payday Loans” (2013), https://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans.
- Virginia Code 6.2-312, https://law.lis.virginia.gov/vacode/title6.2/chapter3/section6.2-312/; Virginia Code, 6.2-1520, https://law.lis.virginia.gov/vacode/title6.2/chapter15/section6.2-1520/.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123 (2018), https://www.legislature.ohio.gov/legislation/legislation-documents?id=GA132-HB-123; Colorado State Law Department, “2016 Deferred Deposit / Payday Lenders Annual Report” (2017), https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/general-information/; Virginia Bureau of Financial Institutions, “The 2018 Annual Report of the Bureau of Financial Institutions” (2019), https://www.scc.virginia.gov/bfi/annual.aspx.
- Colorado Deferred Deposit Loan Act, CRS § 5-3.1-101 (2010), https://coag.gov/office-sections/consumer-protection/consumer-creditunit/uniform-consumer-credit-code/; Colorado Supervised Loans and Supervised Lenders Act, CRS § 5-2.3-301, https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/. Colorado payday lenders operated under the Deferred Deposit Loan Act from 2010 until January 2019, when a voting initiative changed the law. Since then, they have been governed by the Supervised Loans and Lenders Act. Both laws have rate limits, resulting in loan prices that are typically about three times lower than in Virginia and requiring loans to be repaid in installments.
- The Pew Charitable Trusts, “Auto Title Loans: Market Practices and Borrower Experiences” (2015), https://www.pewtrusts.org/en/research-and-analysis/reports/2015/03/auto-title-loans; Virginia Bureau of Financial Institutions, “The 2018 Annual Report”.
- Virginia Bureau of Financial Institutions, “The 2018 Annual Report”. After repossession, consumers have a brief window in which they can pay off their loans plus fees and collect their vehicles, but less than a quarter of borrowers do, a strong indication that loans are unaffordable.
- D. Ress, “Payday Loans Offer Money Fast, But Fees and Interest Leave Many Virginians in Debt” The Virginian-Pilot, January 2, 2019, https://www.pilotonline.com/government/virginia/article_bc523d14-0ac8-11e9-b4e0-8fb4f34cd28f.html.
- National Consumer Law Center, “A Bigger and Longer Debt Trap?” (2018), https://www.nclc.org/issues/a-larger-and-longer-debt-trap-installment-loan.html.
- D. Ress, “Loophole in Credit Law Opens Door to 360% Interest Rate” Daily Press, January 25, 2014, https://www.dailypress.com/government/dp-xpm-20140125-2014-01-25-dp-nws-openendcredit-012-20140125-story.html.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123; Colorado State Department of Law, “2016 Deferred Deposit / Payday Lenders Annual Report”; Virginia Bureau of Financial Institutions, “The 2018 Annual Report”.
- Virginia Bureau of Financial Institutions, “The 2018 Annual Report”; Open-ended lender websites reviewed August 2019. Analysis by The Pew Charitable Trusts.
- LA Bischoff and J. Sweigart, “New Payday Loan Law to Save Consumers $ 75 Million”, Dayton Daily News, April 28, 2019, https://www.daytondailynews.com/news/local/new-payday-lending-law-save-consumers-75m/YC2O8u3prYjfjgsJw8KGQJ/#; The Pew Charitable Trusts, “Ohio, A National Model for Payday Loan Reform” (2018), https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2018/ohio-a-national-model-for-payday-loan-reform.
- The Columbus Dispatch, “Welcome to Fair Loans: New Law Allows Usury-Free Payday Loans” The Columbus Dispatch, April 30, 2019, https://www.dispatch.com/opinion/20190430/editorial-welcome-to-fair-lending-new-law-allows-payday-loans-without-usury; L. Hancock, “Ohio’s new payday loan law comes into effect Saturday. What will change? ” Cleveland Plain Dealer, April 26, 2019, https://expo.cleveland.com/news/g66l-2019/04/b172cdced12409/ohios-new-payday-loan-law-goes-into-effect-saturday-what-will-change-.html.
- Ohio Revised Code, Chapter 1321, Ohio House Bill 123.
- The Pew Charitable Trusts, “Lending in America: Policy Solutions” (2013), https://www.pewtrusts.org/en/research-and-analysis/reports/2013/10/29/payday-lending-in-america-policy-solutions.
- Colorado State Department of Law, “2016 Deferred Deposit / Payday Lenders Annual Report”; The Pew Charitable Trusts, “Trial, Error, and Success in Colorado Payday Loan Reforms” (2014), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2014/12/trial-error-and-success-in-colorados-payday-lending-reforms.
- R. Mayer, “Lending sharks, interest rate caps and deregulation”, Washington and Lee Law Review 69, no. 2 (2012): 807-48, http://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?article=4277&context=wlulr&sei-redir=1&referer=http%3A%2F%2Fscholar.google.com%2Fscholar%3Fq%3DLoan%2BSharks%252C% 2BInterest-Rate% 2BCaps% 252C% 2Band% 2BDeregulation #research =% 22Loan% 20Sharks% 2C% 20Intest; The Pew Charitable Trusts, “Who Borrows, Where They Borrow, and Why”.
- Hancock, “New Ohio Payday Loan Law”.
- Pew’s analysis of the Ohio Revised Code Chapter 1321, Ohio House Bill 123; Virginia Bureau of Financial Institutions, “The 2018 Annual Report”.