Americans of all walks of life use payday loans and vehicle titles, and they typically do so to cover recurring expenses like rent, mortgage payments, groceries, and utilities, rather than for unexpected expenses.1 Only a checking account and a verifiable income are necessary to obtain a payday loan;2 a clear title to a vehicle is generally required to obtain a title loan.
Lenders provide these loans to hundreds of thousands of Virginians every year. And that high-cost credit carries some of the nation’s most lax protections for borrowers, as lenders operating in the state can make loans under any of four laws, two of which allow unlimited interest rates.3 (See Table 1.) As a result, Virginia residents pay up to three times more for this type of credit than borrowers in other states, even those who obtain loans from the same companies.4
Other states, like Colorado and Ohio, have modernized small loan laws to make credit more affordable while keeping it widely available.5 Virginia could follow their lead to better protect borrowers against harmful loan terms. (See Table 2.)
Payday and title loans are hurting Virginians
Virginia’s small loan laws have unusually weak consumer protections, compared to most other laws in the country. As a result, Virginia borrowers often pay more than residents of other states for loans and suffer adverse consequences, such as vehicle repossession and fees and interest that exceed the amount they received in credit. .
- 1 in 8 borrowers in Virginia have a vehicle repossessed each year, one of the highest rates in the country.6
- Lenders sell 79% of repossessed vehicles in the state because borrowers cannot afford to recover them.seven
- Many lenders operate stores and online in Virginia without a license, issuing lines of credit similar to credit cards, but with interest rates often of 299% or more, plus fees.8
- Virginia is one of 11 states that does not cap interest rates on installment loans over $2,500.9
- Virginia has no interest rate limit for lines of credit and is one of six states where payday lenders use such an unlimited line of credit law.ten
- Virginia laws allow lenders to charge Virginians up to three times more than customers in other states for the same type of loan.11
- More than 90% of the more than 650 state-owned payday loan and title deed stores are owned by out-of-state companies.12
Virginia can balance affordability and access to credit by modernizing its small loan laws
In 2018, Ohio lawmakers replaced harmful payday loans and title loans with affordable installment loans at lower prices. Estimates of the resulting savings for Ohio families exceed $75 million annually, which trickles back into the state’s economy.13 And access to credit remains widely available in Ohio from hundreds of approved providers, with new competition from lower-cost lenders.14
The Ohio Equity in Lending Act of 2018 requires lenders to give borrowers enough time to repay in equal installments, with payments representing only a small portion of borrowers’ paychecks.15 By law, any loan issued in violation of state law, whether issued online or in-store, is null, void, and uncollectible, and the Attorney General has the authority to enforce this provision.
In Colorado, similar reforms enacted in 2010 have delivered commensurate results, with lower prices, affordable payments, and reasonable repayment terms.16 State stores have doubled their efficiency, reaching around 1,100 unique borrowers per year.17
Borrowers in these and other states with reasonable small loan laws have not turned to unlicensed lenders in large numbers.18
Through careful reforms like those in Ohio and Colorado, policymakers in Virginia can reduce costs for their constituents, creating affordability for borrowers and a viable market for lenders, including lower-cost providers. who currently avoid operating in the state due to its outdated laws,19 and saving families more than $100 million a year.20
- The Pew Charitable Trusts, “Payday Lending in America: Who Borrows, Where They Borrow, and Why” (2012), https://www.pewtrusts.org/en/research-and-analysis/reports/2012/07/19 /who-borrows-where-they-borrow-and-why.
- The Pew Charitable Trusts, “Payday Lending in America: How Borrowers Choose and Repay Payday Loans” (2013), https://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how -borrowers-choose-and-repay-payday-loans.
- Virginia Code 6.2-312, https://law.lis.virginia.gov/vacode/title6.2/chapter3/section6.2-312/; Virginia Code, 6.2-1520, https://law.lis.virginia.gov/vacode/title6.2/chapter15/section6.2-1520/.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123 (2018), https://www.legislature.ohio.gov/legislation/legislation-documents?id=GA132-HB-123; State of Colorado Department of Law, “2016 Deferred Deposit/Payday Lenders Annual Report” (2017), https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code /general informations/; Virginia Bureau of Financial Institutions, “The 2018 Annual Report of the Bureau of Financial Institutions” (2019), https://www.scc.virginia.gov/bfi/annual.aspx.
- Colorado Deferred Deposit Loan Act, CRS § 5-3.1-101 (2010), https://coag.gov/office-sections/consumer-protection/consumer-creditunit/uniform-consumer-credit-code/; Colorado Supervised Loans and Supervised Lenders Act, CRS § 5-2.3-301, https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/ . Colorado payday lenders operated under the deferred deposit loan law from 2010 until January 2019, when a ballot initiative changed the law. Since then, they have been governed by the Supervised Loans and Supervised Lenders Act. Both laws have rate limits, which translates to loan prices that are typically about three times lower than in Virginia and require loans to be repaid in installments.
- The Pew Charitable Trusts, “Auto Title Loans: Market Practices and Borrowers’ Experiences” (2015), https://www.pewtrusts.org/en/research-and-analysis/reports/2015/03/auto-title-loans ; Virginia Bureau of Financial Institutions, “The 2018 Annual Report.”
- Virginia Bureau of Financial Institutions, “The 2018 Annual Report.” After repossession, consumers have a brief window in which they can repay their loans plus fees and get their vehicles back, but less than a quarter of borrowers do so, a strong indication that the loans are unaffordable.
- D. Ress, “Payday Loans Offer Quick Money, But Fees and Interest Leave Many Virginians Deep in Debt,” The Virginia Pilot, 2 January 2019, https://www.pilotonline.com/government/virginia/article_bc523d14-0ac8-11e9-b4e0-8fb4f34cd28f.html.
- National Consumer Law Center, “A Larger and Longer Debt Trap?” (2018), https://www.nclc.org/issues/a-larger-and-longer-debt-trap-installment-loan.html.
- D. Ress, “Flaw in Credit Law Opens Door to 360% Interest Rate”, Daily Press, 25 January 2014, https://www.dailypress.com/government/dp-xpm-20140125-2014-01-25-dp-nws-openendcredit-012-20140125-story.html.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123; State of Colorado Department of Law, “2016 Deferred Deposit/Payday Lenders Annual Report”; Virginia Bureau of Financial Institutions, “The 2018 Annual Report.”
- Virginia Bureau of Financial Institutions, “The 2018 Annual Report”; Open credit lender websites reviewed August 2019. Analysis by The Pew Charitable Trusts.
- LA Bischoff and J. Sweigart, “New Payday Loan Law to Save Consumers $75 Million,” Dayton Daily News, 28 April 2019, https://www.daytondailynews.com/news/local/new-payday-lending-law-save-consumers-75m/YC2O8u3prYjfjgsJw8KGQJ/#; The Pew Charitable Trusts, “Ohio, A National Model for Payday Loan Reform” (2018), https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2018/ohio-a- national-model -for-payday-loan-reform.
- The Columbus Dispatch, “Welcome to Lending Equity: New Law Allows Wear-Free Payday Loans,” The Despatch of Columbus, 30 April 2019, https://www.dispatch.com/opinion/20190430/editorial-welcome-to-fair-lending-new-law-allows-payday-loans-without-usury; L. Hancock, “Ohio’s New Payday Loan Law Goes Into Effect Saturday. What will change? » Cleveland Plain Dealership, April 26, 2019, https://expo.cleveland.com/news/g66l-2019/04/b172cdced12409/ohios-new-payday-loan-loan-goes-into-effect-saturday-what-will-change-. html.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123.
- The Pew Charitable Trusts, “Payday Lending in America: Policy Solutions” (2013), https://www.pewtrusts.org/en/research-and-analysis/reports/2013/10/29/payday-lending-in- america-politics-solutions.
- State of Colorado Department of Law, “2016 Deferred Deposit/Payday Lenders Annual Report”; The Pew Charitable Trusts, “Trial, Error, and Success in Colorado’s Payday Lending Reforms” (2014), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2014/12/trial- error-and-success-in-colorados-payday-loan-reforms.
- R. Mayer, “Usury Loans, Interest Rate Caps and Deregulation”, Washington and Lee Law Review 69, no. 2 (2012): 807-48, http://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?article=4277&context=wlulr&sei-redir=1&referer=http%3A%2F%2Fscholar.google.com%2Fscholar %3Fq%3DLoan%2BSharks%252C%2BInterest-Tate%2BCaps%252C%2Band%2BDeregulation#search=%22Loan%20Sharks%2C%20Interest; The Pew Charitable Trusts, “Who Borrows, Where Does They Borrow and Why?”
- Hancock, “Ohio’s New Payday Loan Law.”
- Pew’s analysis of Ohio Revised Code Chapter 1321, Ohio House Bill 123; Virginia Bureau of Financial Institutions, “The 2018 Annual Report.”