Consumer finance firms in the US have been operating under a 30-year-old outdated system. Now that the government wants to update the laws covering the finance industry by passing SB 489, it appears that consumer advocacy groups are ranting and raving over it. The bill, although presented to reduce the current maximum interest rate on loans, will actually trigger higher interest rates for the majority of borrowers. .
The proposed bill actually means higher interest rate
If the bill is signed into law, this means that borrowers will end up paying from $50 million to $70 million more than they are supposed to pay in a year.
The bill will cut down the current maximum interest rate from 36 percent to 30. But the current maximum interest rate is only applicable to loans of up to $1,000, which means that borrowers of bigger amounts of loans will not enjoy lower rates.
However, the bill would also allow finance companies to charge consumers with a 30 percent rate interest rate to loans that are up to $5,000. This means higher interest rate kicks on bigger dollar loans. Lending companies may also be allowed to provide loans from $10,000 to $15,000, and with higher interest rates.
For instance, a borrower applies for loans amounting to $7,500. In the old system, they have to pay 30 percent on the first $1,000. The remaining amount of $6,500 will be charged with 18 percent additional interest rate. But with the new bill, consumers have to pay the first $5,000 with 30 percent and 24 percent for the remaining amount of loan.
The future of the new consumer loans bill
According to industry experts, SB 489 will most likely be signed into a law considering the strong legislative support it has. There are about 23 primary and co-sponsors, wherein four are Democrats, and 19 are Republicans. Analysts reiterated that raising the interest rate on consumer finance loans now is not good timing. They advised legislators to take into account the current state of the economy, which is still on the recovery process.
The consumer and housing project director of the N.C. Justice Center, Al Ripley, explained that finance companies do not worry about giving up the 36 percent interest rate on smaller loans. This is because they make much more with the bigger ones.
Ripley also revealed that many consumers can’t afford to pay their loans. As a result, they resort to bad credit loans and become stuck in the cycle of borrowing due to poor credit management.