Colorado is admired for many things. A healthy, active population. Sunny, blue skies. Our mountains, skiing, trout-filled waters. And don’t forget craft beers.
Now, there’s a new one to add to the list: our reforms of payday lending. It took three years of trying, but in 2010, lawmakers, policy advisers and advocacy groups came up with a way to make these high-interest loans a better product.
So far, our approach has been unique to Colorado. But recently, the Pew Charitable Trusts released a report saying that Colorado’s reforms are working and could offer a starting point for other states and even the federal Consumer Financial Protection Bureau to make payday loans less damaging for more citizens.
Traditional payday loans are small, expensive loans that must be repaid in full, including principal and fees, generally from the borrower’s next paycheck. In 2009, the last full year Colorado allowed them, the average payday loan was $368, carried an average annual percentage rate of 318 percent and was paid off in about 19 days. Given the high cost, short payback period and lump-sum repayment requirement, many borrowers found they could not pay off the loans and ended up trapped in a cycle of debt.
The Colorado Attorney General’s Office, which regulates these loans, reported that one-third of all payday loans in 2009 were renewed, and about another third were new loans taken out on the same day that an old loan was paid off. In short, the attorney general concluded that about 61 percent of all payday loans were “refinance-type” transactions where the borrower remained on the hook to the payday lender.
The 2010 reforms reduced the fees on payday loans, extended the length of the loans to a minimum of six months, authorized installment payments, allowed borrowers to repay them early without penalty and required all fees to be refunded on a pro-rated basis, depending on how long the loan was outstanding.
In 2012, the attorney general reported, the average “new” payday loan was $394, carried an average annual percentage rate of 129 percent and was paid off in about 99 days. Most telling, none of these loans were refinanced or renewed. Clearly, borrowers are avoiding the debt trap.
As a result of these changes, Coloradans are paying less in fees to payday lenders. Pew calculated that borrowers saved about $41 million in 2012 over what they paid in 2009 under the old law. We estimate the savings are more than $50 million after accounting for loans taken out in one year but paid off in the following year. Either way, borrowers are much better off.
Pew researchers held focus groups with Colorado borrowers, and they reported that the new loans were “manageable” and “easier” to repay. This is consistent with what people tell us about the reforms.
Contrary to predictions from payday lenders and the law’s critics, the reforms have not caused the industry to shut down and leave the state. Granted, there has been a consolidation, with the number of stores dropping from 505 at the end of 2009 to 238 in the middle of 2013, but Coloradans still have access to this form of credit, and many payday lenders remain in business.
In fact, 77 percent of all Coloradans live within five miles of a payday lender, according to Pew’s calculations, about the same as in 2010 before the reforms took effect.
Coloradans pride themselves on their independence and pragmatism. It is gratifying that Pew, a highly respected research and policy organization, after careful study, found that Colorado’s unique approach to reform is working and that it could serve as a foundation for other states working to institute payday lending reforms.
But more gratifying is the fact that our friends and neighbors who use these loans are better off and have a bit more cash to enjoy the benefits our great state has to offer.
Rich Jones of the Bell Policy Center and Corrine Fowler of the Colorado Progressive Coalition were among the leaders of Coloradans for Payday Lending Reform. Reach Jones at jones@bellpolicy.org and Fowler at corrine@progressivecoalition.org.
