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You can’t travel far in Las Vegas without seeing a payday loan storefront.
Payday loan companies provide money fast, but they are criticized for their high interest rates.
In a recent opinion piece in the Las Vegas Sun, UNLV law school professor Benjamin Edwards explained the problems with payday loans and ways he thinks the state could alleviate those problems.
“We have a large population of people who make money but don’t necessarily have a lot of financial security,” he said.
He said a recent nationwide survey showed a large number of people would not be able to come up with $400 in an emergency, which is why payday lenders exist.
“You’ll borrow it for a short-term need but then because of the interest and other payments people find themselves stuck in a debt trap and they can’t get out,” he said.
Edwards said most people who borrow from payday lenders don't pay it back and the loan is rolled over. With a 600 percent a year interest rate, a $200 loan could end up costing upwards of $1,000.
“Into that mix, we have this real problem and it is how to make sure people that need access to capital that they can get without being taken advantage of,” he said.
Edwards said another part of the problem is that payday lenders aren't really competitive. He said that most people who are getting the loans are not in a position to shop around for the best deal.
“They need help and they go in and they take the deal that’s offered,” he said.
So, waiting for the market to set fair interest rates will not work. Instead, Edwards said that setting an interest rate cap will work. Under federal law, payday lenders can't charge more than 36 percent interest rates to members of the military.
Edwards said there is general agreement that 36 percent would be a good number to cap interest rates.
That is not the only solution.
He also believes there needs to be better monitoring of the loans so lenders can see if a borrower has a loan already outstanding. Edwards said that would help cut the default rate, which is already extremely high in the industry.
Edwards also says state regulators need the tools to better see what lenders are doing. Right now, a bad actor can go for months without being detected.
Benjamin P. Edwards, Associate Professor of Law, William S. Boyd School of Law, UNLV