Congress is considering several bills dealing with the banking industry.

One of them would cap interest rates on loans at 36 percent APR.

While it`s meant to protect consumers, it may shut down businesses like pawn shops that offer payday loans to people who may have no other way to get the money they need in a pinch.

If your car breaks down, and you need a few bucks to make it through to payday, a two-week loan with a 20 percent fee may be the cheaper route to go, rather than bouncing a check. In fact, many North Dakotans do it. The state has $1.7 million in outstanding payday loans, and pawn brokers like Jay Couture say it`s a necessary service.

“We offer the fall back position,” says Couture. “They can come in and borrow 15, 20, 100 bucks. The things that a bank wouldn`t begin to offer.”

But if Congress passes legislation to cap usury rates at 36-percent, pawn brokers and other payday lenders say that service would no longer be an option. If you do the math, that two week loan formulated at an annual rate, comes out to a nearly 500-percent interest rate. Lenders say reducing their fees would wipe them out.

“On a $100 loan for 15 days, we`d be allowed to earn $1.50 in interest and we would be out of business,” says Couture. “I wouldn`t be able to pay my rent.”

The state regulates pay day loans and the Department of Financial Institutions says there are a number of protections in place for consumers. The state has a database that tracks each and every payday loan, and once you reach the maximum amount you can borrow, you`re prevented from getting another loan. But there is the fear of getting around the system.

“You can always go online and find someone who`s an unregulated payday lender, pay a lot higher fees and I think that`s where some of the concern is coming from Congress,” says Tim Karsky, of the Department of Financial Institutions. “Some people are paying an enormous amount of fees to get what are supposed to be short-term loans to get through the next payday.”

But Couture says the cap will do more harm than good, preventing thousands of North Dakotans from staying above water when the unexpected happens.

The Department of Financial Institutions says it believes consumers are adequately protected in the state.

The agency conducts exams on all payday lenders about every two years.

It adds if this bill were to pass, it could affect the availability of credit during a time it`s needed most.

This entry was posted on Thursday, May 14th, 2009 at 12:00 am and is filed under Personal Loans . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.