A new report from the State of Colorado Department of Law indicates that Colorado has seen a significant reduction in the amount of payday loans being withdrawn by consumers, with 60% less loans being borrowed compared to last year. The report claims that there has been an estimated 17 % decrease in payday loan consumers. Because those who utilize these services tend to be repeat customers, the Colorado loan industry has lent less than half of the amount of loans when compared to 2011. This reduction in loans has led to a reduction in payday lenders as well, with 14% less brick-and-mortar businesses of this nature operating in the state of Colorado. Clearly, the industry in Colorado is suffering.
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Although several factors may contribute to these figures, including a high unemployment rate in the state, the introduction of new legislation concerning such loans is being cited as the largest contributor. These new regulations have imposed limits on the amount of money that can be borrowed, along with the imposition of caps on the interest rates that payday loan lenders can charge for these services. Perhaps the most influential piece of legislation, however, is a new law that changes the duration of payday loans from two weeks to a minimum of six months.
This law makes it difficult for lenders to compound debt, which often happened when a borrower was unable to repay his/her loan in the traditional two-weeks period, as the six month period makes repayment easier and more feasible. As can be gathered from the aforementioned decrease in payday advance reliance, these new laws appear to be effective.
Despite the decrease in the amount of payday advances being borrowed, the use of other types of small loan services has seen a significant increase. The utilization of small-installment loans, which have lower interest rates than traditional payday loans, has increased by more than 180 %, according to the aforementioned Colorado state report. Small-installment loans may be more desirable to consumers because they provide more money on the spot, up to $1,000 in comparison to the $500 maximum of a payday advance loan, and accrue less interest. Thus, consumers can borrow more but pay less, a desirable exchange indeed.
Attorney General John Sutters claims that the changes in the laws concerning payday advances and their providers saved Colorado consumers $100 million last year alone. This savings is direly needed in Colorado, which has suffered greatly since the 2007 market crash and corresponding recession. As in other states with restrictive lending laws, more regulation results in less payday loan usage. However, people in crisis will seek out other options when needed.
While installment loans might be a better option than their payday counterparts, they still have issues in their own right. Even with the relatively low interest rate of 10%, consumers are still paying more for the convenience of quick cash than necessary. In cases of emergencies, such an option is viable and useful; however, with over-use it can be detrimental to one's financial health. Relying on such services can become a crutch that encourages one to seek out quick cash options rather than invest in a savings account.
Nearly one-third of the American population is without savings, according to a recent FDIC survey. This somber number indicates that a substantial portion of the American populace is not prepared for unexpected emergencies; as such, high reliance on fast-money options will continue to be a problem.
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