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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 10, 2012

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The war over payday loans in Missouri continues to thrive as a petition has gained momentum to establish an interest rate cap on installment and payday loans.

 

The petition would cap the interest rate for these short term forms of borrowing at 36 percent—a significant decrease considering some payday loans are offered at interest rates of several hundred percent. But surprisingly, a crowd of several hundred strong gathered at the steps of the state’s Capitol to fight against the petition, citing their fear that the cap will drive short term lenders away from the state.

 

The Line Drawn in the Sand

 

“[The petition] overreaches and eliminates traditional installment loans which are safe, responsible and needed,” said Tom Hudgins, chairman and CEO of Stand Up Missouri, a group sponsored by the short term lending industry and designed to thwart the new initiative and educate the public further on installment loans, as reported by KRCG.

 

Hudgins and his group believe that short-term loans are necessary to a healthy society in which all individuals need access to financing, but many of whom are rejected at traditional banks and credit unions.

 

Without short-term loans, some fear those with low credit or no credit will turn to loan sharks—who would offer money at illegal rates and perform collections through less-than-reputable means.

 

But Columbia Democrat Mary Still thinks otherwise. “It will not [cut off access to money],” Still told KRCG when asked about the petition. “You can get loans at credit unions and they can make money at 36 percent as well.”

 

A Question of Interest

 

The high interest rates charged on these loans have been the spark of debate for years. The two schools of thought have long been polarized and pitted against one another, as very clearly represented in this case by Hudgins and Still.

 

Those in favor of the high installment and payday loan rates claim that such charges are necessary in order to turn a profit given the inherent unreliability of their consumers. When granting financing to those with little or no credit, and not requiring any real collateral, the risk of default is very high. So high, in fact, that one Reuter’s contributor claims its right around 6 percent.

 

The other side of this argument, often represented by consumer advocates, claim that loans with APRs of 2, 3, and 400 percent are nothing short of usurious.

 

“Seventeen other states and the District of Columbia have put interest-rate caps on small-dollar loans and we’ve found that in states like North Carolina or Florida that they can still make reasonable, ethical loans at lower interest rates, said Sean Soendker Nicholson of Progress Missouri, to KRCG.

 

While Hudgins and Stand Up Missouri claim to represent installment loans and do not support payday loans in anyway, Still and other critics of the short-term loan industry make no distinction between the two.