Texas is heading in the wrong direction on high interest loans

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If you need a few dollars to get through a financial emergency, the solution can cost a lot more than you think.

Two bills going through the House and Senate in Austin would raise the statutory cap on how much finance companies could lend to people who need a relatively small amount of money quickly.

The financial industry argues that this change is necessary because consumers need access to small loans, but insists that the current cap, now at $ 1,460, makes these loans financially impractical for lenders. Citing a report from state regulators, lenders say the current cap is artificially low, creates a “credit desert” for borrowers and pushes consumers to unlicensed lenders, pawn shops, credit card advances and more. payday lenders.

Obviously, there is some truth in the claims of the financial industry. Credit deserts are real, and access to credit is generally more difficult and costly for poor and minority borrowers. But there is more to the story than just making credit more accessible.

House Bill 2432 and the accompanying Senate Bill 1089 would change Chapter 342, Subchapter F – the statute of the finance code that governs small installment loans – to increase the limit for small installments. loans at $ 2,190. However, consumer advocate Texas Appleseed, who opposes the bills, says monthly finance rates and transaction fees on a two-year $ 2,000 loan would offer consumers an annual percentage rate of about 79%. And the total cost of the loan could exceed $ 4,000 if the borrower refinances the loan, Appleseed says,

So how does Texas stack up against the 42 states and the District of Columbia that have maximum loan amount caps? According to the National Consumer Law Center, the national median APR on a two-year $ 2,000 loan is 32%. If lawmakers allowed the increase in the dollar limit, the 79% APR on a two-year $ 2,000 loan in Texas would only be exceeded by New Mexico’s shocking 175% APR on the same amount.

These loans are not as expensive as payday loans, but the reality is that there is nothing cheap at an interest rate of 79%. On Tuesday, Texas Appleseed, the Texas Catholic Bishops’ Conference and Central Texas United Way testified against the bills, describing the proposed change as promoting high interest debt to vulnerable borrowers.

Texans need borrowing options, and lenders have a right to profit. However, these bills do not properly balance the need for available credit against the real cost of these loans to consumers and should not become law.

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