Hawaii enacts new restrictions on payday loan rates and repayments
Hawaii Governor David Ige signed a bill on Tuesday that will cap interest rates on payday loans at 36% in the state.
But this new law, which will come into effect on January 1, 2022, goes beyond simply capping the maximum interest allowed. It will also force the licensed payday loan industry to offer installment loans instead of traditional payday loans with a one-time payment due two weeks after an amount is borrowed.
“We believe this measure will be better for consumers, as well as payday lenders across the state of Hawaii,” Ige said at a press conference Tuesday. “Consumers will have the ability to repay small consumer loans in installments they can afford, while payday lenders will see an industry cleanup as these good businesses in our community can operate fairer. and appropriate.”
These small consumer loans, which can reach a maximum of $1,500 under the new law, will be repayable over a period of two to 12 months, depending on the size of the loan, as opposed to the traditional two weeks.
Annual interest rates are capped at 36% under the new Hawaiian law, but lenders are allowed to charge monthly fees of up to $35 depending on the loan amount. However, the total costs cannot exceed half of the initial amount borrowed, according to an analysis by Pew Charitable Trust.
“Under the new law, small installment loans will cost consumers hundreds of dollars less,” writes Nick Bourke, director of consumer finance at Pew. “It will make these small loans available with appropriate protections and incorporate proven policies that have garnered bipartisan support in other states.”
Prior to the new legislation, payday lenders in Hawaii charged annual percentage rates of up to 460%. This means that to borrow $500 over four months, a client would pay $700 in finance charges. Now customers will pay $158 in finance charges, according to Pew’s calculations.
As the bill swept through the Hawaii state legislature, lenders were split on the measure, according to Hawaiian media Honolulu Civil Beat. The parent company of local convenience chain Money Mart expressed support for installment loans, but Maui Loan Inc. opposed the measure.
With its new law, Hawaii joins Illinois and Nebraska as states that recently passed payday loan reform measures. Nearly 20 states, as well as Washington DC, impose a 36% rate cap on payday loan interest rates and fees.
Federal lawmakers have introduced similar legislation by the Fair Credit Act for Veterans and Consumers in November 2019, this would cap interest rates at 36% for all consumers nationwide. The legislation — which is the latest attempt to curb payday loans at the federal level — was developed from the framework of the Military Loans Act 2006which capped loans at 36% for active duty military.
Despite Democratic and Republican co-sponsors when it was introduced, the bill remains stalled, forcing states to advance local legislation.
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