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Lenders Raising Interest Rates to Lower-Income Borrowers

November 2, 2014
Plain English Version

Interest ratesPayday lenders compete with other loan-makers. They make loans to sub-par borrowers. A sub-par borrower has a lower credit rating.  Payday lenders try to work outside the system of interest rate rules.

Big banks, such as Citigroup, lend to more affluent borrowers. The borrowers’ credit ratings are good. The interest rates charged by the banks are lower. Big bank lenders are regulated.

Regulated lenders have to get permission to increase their interest rates from the states in which they are located. They also want to charge higher fees.

At least eight states have voted to increase the fees or the interest rates for personal loans to borrowers with sub-par credit.

North Carolina is a good example. Lenders and lobbying groups wanted the legislature to let them raise interest rates. The lenders said their costs were going up. They said they provide important financial services to borrowers.

There are many military bases and members of the armed forces living in North Carolina. Base commanders objected to rate increases, saying that raising the cost of loans would do harm to soldiers and their families. They said too much debt impairs our military effort.

The legislature agreed with the military. The law to raise interest rates did not pass. However, the next year, North Carolina passed the law.

One lawmaker said, “There was simply no need to change the law. It was one of the most brazen efforts by a special interest group to increase its own profits that I have ever seen.”

Other states, including Kentucky, Arizona, Missouri, Indiana and Florida have passed laws raising interest rates for lower-income borrowers.

Source: The New York Times October 21, 2014

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