Putting rate caps on cash loan providers benefits few

More states are placing rate caps on cash advances. The idea is to altruistically keep innocent consumers from being gouged by evil loan companies on interest. In reality, rate of interest caps are an unfair standard on cash loans. Nearly half of all cash advance loan lenders are small business owners, and their margins are being constrained.

Math on the rate cap for cash advances needs redoing

States have started introducing many rate of interest caps on loans. Typically about a 36 percent APR on cash advances is where the cap lies. There are some issues with a 36 percent cap even though it may seem logical. First, one can hardly assess the fees on a cash till payday or payday loans as APR. Payroll loans can't be considered under annualized percentage rates. Two weeks at probably the most is used by these loans for maturation. Let's say a loan lender lends $100. Say the charge is $20. The APR would be 240 percent if the $20 charge was compounded once a month. If it is assumed to compound each two weeks, that $20 fee is 480 percent annual interest. However a fee of $20 per $100 assessed in simple interest, or a ratio of the total amount paid back to the amount borrowed, it is only 20 percent interest.

Cui Bono on everyone's mind

The phrase “cui bono”, in Latin, essentially means “Who Benefits?”. In the case of a short term loans rate cap, the beneficiary is banks and credit unions. Credit cards look a lot more attractive than pay day loans when APR is the standard. Payday advance looks much better though when considering the total amount a person pays back in simple interest vs. a credit card.

Price ceilings that are bad again

Essentially rate caps function as price ceilings, where a business has to charge no more than a certain amount. This means that the margin for profit is drastically reduced, and the consumer cannot benefit from price competition. Independent small business owners are what 50 percent of all payday loans store owners are. Is that who should be punished in this economy? Want to know more? Take a look at the Pay day loan Facts and Statistics Report on Personal Money Store.