Hawaii Governor David Ige signed a law on Tuesday that will limit the interest rates on payday loans to 36% within the state.
But this new law, which comes into force on January 1, 2022, goes beyond the limit on the maximum permissible interest. It will also force the licensed payday industry to offer installment loans in lieu of traditional payday loans with a single payout due two weeks after the loan was taken out.
“We believe this move will be better for both consumers and payday lenders across the state of Hawaii,” Ige said during a news conference Tuesday. “Consumers will be able to repay small consumer loans in installments they can afford, while payday lenders will see the industry purge as these good companies in our community can act fairer and more appropriately. “
These small-dollar consumer loans, which under the new law can amount to a maximum of US $ 1,500, are repaid within two to twelve months, depending on the loan amount, as opposed to the conventional two weeks.
Annual interest rates are capped at 36% under the new Hawaii law, but lenders are allowed to charge a monthly fee of up to $ 35 depending on the size of the loan. However, the total fees may not exceed more than half of the amount originally borrowed, according to an analysis by the Pew Charitable Trust.
“Under the new law, small installment loans cost consumers hundreds of dollars less.” writes Nick Bourke, Pews Consumer Finance Director. “It will provide these small loans with adequate protection and incorporate proven policies that have received bipartisan support in other states.”
Before the new legislation, payday lenders in Hawaii charged annual percentages of up to 460%. That is, for a $ 500 loan over four months, a customer would pay $ 700 in funding fees. According to Pew’s calculations, customers are now paying $ 158 in funding fees.
When the bill passed through the state legislature of Hawaii, lenders were split over the measure. According to Hawaii News Agency Honolulu Civil Beat. The parent company of the local payday chain Money Mart advocated installment loans, but Maui Loan Inc. rejected the measure.
With its new law, Hawaii joins the states of Illinois and Nebraska, which recently passed payday lending reforms. Nearly 20 states, along with Washington DC, have a 36% interest rate cap on the interest rates and fees on payday loans.
The federal legislature has introduced similar laws through the Veterans and Consumers Fair Credit Act in November 2019 this would cap interest rates for all consumers nationwide at 36%. The legislation – the latest attempt to curb payday loans at the federal level – has been out of bounds Military Loans Act 2006, which capped lending to active-duty members to 36%.
Despite Democratic and Republican co-sponsors, the law has stalled in its introduction, forcing states to push local legislation forward.
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