Peter Schorsch
Critics of short-term, small-dollar loans grumble about the supposedly high cost of this important financial option, complaining that these loans often carry a hidden annual percentage rate (APR) exceeding 200 percent.
This is a deceptive accusation because APR isn’t applicable in the context of this kind of loan, and all terms of the loan are clearly communicated to customers beforehand, as required by Florida law.
Truthfully, any form of short-term credit will look expensive when expressed in annual terms.
According to a study by the Federal Deposit Insurance Corporation (FDIC), for example, simple bank overdraft fees — when expressed as an APR — can reach a staggering 3,520 percent. Yet everyone seems to accept these fees as a normal part of banking.
Now consider that the fees associated with a short-term loan are typically less than the cost of two overdrafts (not to mention the late fees, merchant return fees, and reconnect fees that can go along with a bounced check).
Anyone who takes out a small-dollar loan to avoid bouncing a couple of checks is actually saving money — no matter what the critics try to say about the supposed interest rate.
The same individuals who criticize small-dollar loans have been quick to oppose Florida legislation intended to enhance the state’s short-term credit product for consumers.
The proposal, SB 920 and HB 857, would create a new framework that conforms with federal guidelines while also retaining the choices Floridians need and deserve.
Both bills also preserve the current protections of Florida’s exceptional law and caps fees at a rate lower than what is now set in statute — a key fact that bill opponents may wish to read up on.
Here’s an easy way to understand why APR is a bogus way to measure short-term financial transactions.
Consider if you withdraw $100 from an ATM that isn’t part of your bank. Typically, you’ll be charged a $3.00 fee for this out-of-network transaction — in essence, the other bank is giving you a one-day cash advance, knowing it will get the money from your bank the next day.
The $3 fee for that one-day advance translates into an APR of 1,095 percent.
In contrast, the theoretical APR on Florida’s existing 30-day small-dollar loan product — and the 60-90 day small-dollar loan product in the legislative proposal — is about 200 percent.
The loan instrument envisioned in this legislation would allow no interest or fees to accumulate beyond the three-month term of the loan agreement, which distinguishes it from credit cards or bank loans that accrue interest on unpaid balances for an unlimited period.
Misleading claims about APR and small-dollar loans obscure the crucial efforts of numerous Florida lawmakers who have worked hard to build an effective, consumer-friendly system of short-term credit.
Since 2001, Florida’s system has served as a model for the rest of the nation; now our legislators are working to keep short-term credit available to Floridians who need it.
