Many institutions prefer not to write small loans because, while the return on a $5,000 loan is greater than if only $500 is borrowed, the originating and servicing costs are not significantly different. The national finance companies, which were initially founded to meet precisely this credit need, have moved out of this type of small lending. As a result, the availability of small-sum, short-term credit has been severely curtailed and a Florida consumer protection lawyer could have helped.[3]
Much of the market for small unsecured loans today has been replaced by checking account overdraft loans and credit cards, even for relatively lower income households. From 1993 to 1996, the proportion of households with incomes under $20,000 who received credit card offers rose from 40% to 50%.[4] This still leaves a large number of consumers without sufficient credit card limits or bank overdraft protection to meet their needs for relatively small unsecured loans, and who no longer have access to traditional sources of small loans.
At the same time as traditional lenders were exiting the small loan market, the elimination of interest rate caps that began in the 1980’s made this niche attractive to new entrants. The move to deregulate interest rates was fostered by Congress passing several laws pre-empting state usury caps on first lien mortgages.[5] Many states have raced to the bottom in their haste to respond to industry pressure to de-regulate (or “I will take my business elsewhere” — presumably to Delaware or South Dakota.)[6] One result — an explosion in what is now called payday loans.
The industry itself estimates the potential market for payday loans at approximately 35 million households.[7] It is difficult to estimate the growth in the industry as a whole since 1990 but information from several states is illuminating.
Since 1990, the number of outlets offering such loans in Colorado rose from about 12 to an estimated 188 and Colorado officials estimate that payday lenders make up 20% of all licensed lenders.[8] In its 1997 annual report, the Attorney General of Colorado noted that these lenders made 374,477 such loans totaling $42,823,089. The average annual percentage rate (APR) charged on these loans was 485.26%.
Missouri reports that this is a growing business and licenses about 450 lenders. Florida has registered 368 payday lenders since 1994. Idaho now has about 74 payday lenders in its state, up from just 2 in 1993. North Carolina licenses approximately 203 lenders while it neighbor, South Carolina, accommodates 325. In 1998, Tennessee was home to about 257 companies operating 605 offices statewide.
Information from the state of Washington reveals that 562,031 loans were made by check cashers for a total of $144,923,986 in 1997. Lenders collected $21,541,338 in fees. In Indiana, the number of payday lenders leaped from 15 in 1994 to 115 (with 454 outlets) in 1998. The loan volume grew from $12,688,599 in 1995 to about $296,098,015 in 1998. Since 1998 alone, Mississippi has issued about 625 payday loan licenses.
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