According to a report by The Pew Charitable Trusts, Wisconsin residents who take out short-term payday loans face some of the highest costs in the United States.
Bench information note found that Wisconsin residents pay an average of $395 in fees when repaying $500 loans over a four-month period. This equates to an average interest rate of 338%.
“Borrowers in states without adequate regulatory safeguards pay only a small fraction of principal in each monthly payment and APRs in the 200, 300 or even higher ranges,” the report said. “Previous research from Pew found that typical payday loan borrowers can afford payments equivalent to about 5% of their income or $125 per month, but high-cost installment loans often require payments that exceed $200. $ – even $300 – per month.
Pew compared fees in states like Colorado, Hawaii, Ohio and Virginia that have enacted payday loan reforms with those that have not. On average, the report says residents of reformed states pay between $110 and $158 less than those who don’t reform when repaying $500 loans over four months with interest rates between 114 and 144%.
“The laws in these states offer significantly lower prices, reasonable repayment terms and affordable installments, the three key elements of successful reform,” the report said.
Alex Horowitz is a senior executive at Pew’s Consumer Finance Project. He said Wisconsin is one of seven states that does not cap interest rates charged by payday lenders, adding that companies have argued capping interest rates would bankrupt them and limit access to credit. But he said many payday lenders operating in Wisconsin are still doing business in reformed states like Colorado and Ohio.
“The difference is they charge Wisconsin residents double or triple what they charge in states like Ohio, Virginia, Colorado, Hawaii,” Horowitz said.
The report says lenders across the United States charge the maximum interest rates allowed by state law “and only lower prices if necessary.”
In April 2021, Republican lawmakers in Wisconsin introduced legislation this would cap payday loan interest rates at 36% and render payday loan repayments with higher interest rates inapplicable.
Current Wisconsin laws include no limit on the amount of interest payday lenders can charge before a loan matures.
The resolutions were not passed at the end of the legislative session.
Data from the Wisconsin Ethics Commission shows the City of Milwaukee, Outagamie County Board of Supervisors, Wisconsin Credit Union League, Wisconsin Public Interest Research Group and Chapter of the National Association of Social Workers-Wisconsin have signed up in favor of the reform bills.
The Wisconsin Bankers Association, Cottonwood Financial Ltd. and Axcess Financial Services Inc. have filed against bills capping interest rates on payday loans.
Horowitz said legislative reforms in Wisconsin and other states are needed to protect vulnerable borrowers from further financial stress.
“It’s a problem that affects households that live paycheck to paycheck,” Horowitz said. “And that’s why we see borrowers who are in dire straits and are accepting interest rates over 300 percent.”