Payday loans: Should interest rates be capped

California isn’t one of those states. A bill here died in committee last session, and sponsor Assemblyman Dave Jones, D-Sacramento, hasn’t decided yet whether he will try again next year.

In 2006, Congress capped rates on payday loans, as they are commonly known, made to military personnel and their families. Authorities limited such loans to 36 percent, worried that the mounting debt of service men and women put national security at risk.

Without that cap, a loan that is not paid off at the end of two weeks can potentially generate fees that translate to triple-digit interest rates.

Asked if he favored an interest rate cap, local West Coast Cash customer Ricky Squires, 60, initially said yes.

But when told the industry says that would drive them out of business, Squires backed away.

“It’s probably a good idea, but if it puts them out of business, I don’t think they should do it,” he said.

Over the last two years, 15 states and the District of Columbia have limited interest on payday loans to civilians. They are Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia.

In Arizona and Ohio, the caps have been challenged, and voters will have an opportunity to weigh in on whether the laws should stand.

HURTING THE POOR?

Critics of payday loans say they are money pits that prey on the poor.

“These loans totally trap people in a cycle of debt that they can’t get out of,” said Ginna Green, a spokeswoman for the nonprofit Center for Responsible Lending.

The Community Financial Services Association of America, a national payday loan industry trade group, argues that fees for the initial loan are reasonable, and people who pay on time don’t get into trouble.

Under current law, Californians pay a maximum fee of $17.65 per $100 borrowed for two weeks. That translates into annual interest of 460 percent.

It’s that annual figure that troubles opponents.

“Borrowers don’t pay them off on time,” Green said. “They carry them over, and the debt gets bigger and bigger. The industry says it’s about choice, but nobody chooses to owe $3,000 on a $300 loan.”

An average payday loan in California is 16 to 18 days, according to the California Financial Service Providers Association, the state’s payday loan industry trade group.

A WAY TO MANAGE

It’s easy for middle class bank customers to dismiss payday loans, but they provide a desperately needed service for low-income workers who don’t have a lot of options, said Mark Thomson, director of government relations and compliance officer for Moneytree.

“You have to realize that our relationship with debt is different,” said Thomson, who serves on the state trade association’s legislative committee. “You or I walk into a Best Buy, see a $1,700 flat-screen TV, and decide we don’t want to finance it. Without that loan, nothing changes in our daily life.

“For most of our customers, some adverse event is going to happen. They are going to bounce a check, or their utilities are going to get shut off, or they have to get a car out of the shop so they can get to work.

“There’s already something about to happen to them, and they’re trying to find the cheapest way they can to manage it.”

Payday loans are one way to do that. For some, it’s the only way, because they don’t have good credit and can’t access a credit card or a loan from a traditional bank, Thomson said.

If payday lenders go out of business, subprime borrowers will have nowhere to turn, and with a 36 percent cap, California’s payday loan industry will die, Thomson said.

Profit margins are low already, he insisted. Fees are just high enough to cover loan defaults and the cost of doing business.

Consumer Credit Counseling Service of Kern and Tulare Counties is a nonprofit organization that helps borrowers get out of debt and offers budget management classes.

CCCS doesn’t have an official position on capping payday loan interest rates, but it advises clients not to borrow from payday lenders, said president and chief executive Katy Hudson.

Lower home loan interest rates, make process easier

Speakers at a roundtable discussion yesterday called for bringing down the home loan interest rates so that common people could avail the opportunities of building their own homes without difficulties.

They also called to make home loan getting procedures easier.

The meeting was addressed, among others, by Abu Alam Chowdhury, Vice-President of Federation of Bangladesh Chamber of Commerce and Industry (FBCCI), Shahidullah Osmani, Managing Director of SD Properties and Ershad Mazumdar, Chief Editor of Monthly Gharbari.

Mentioning shelter as basic rights of people, Abu Alam Chowdhury said, "Political parties, whichever wins in the forthcoming election should ensure habitation rights of the people."

He urged the banks and financial institutions of the country to provide common people with house building loans at lower rate of interest.

The FBCCI VP also urged the home loan recipients to pay off their respective loans.

Emphasizing on providing low rate of interest and introducing easy loan process, Abu Alam Chowdhury also raised the crucial issue of land grabbing in the city.

He called for launching a united movement against the land grabbers.

Ershad Majumdar called for introducing five per cent registration cost and five per cent interest rate for a house of 500 to 700 square feet in the capital. The registration charge for a house of 700 to 1500 square feet should be fixed at eight per cent where normal interest rate and registration charge should be introduced for the house of over 1500 feet.

He also asked to make house-building loan sanctioning procedures easier.

Ershad Majumdar informed that they would submit their demands before Bangladesh Bank soon.

Using credit cards to pay loans, bills attracts interest

With more Americans struggling to pay for basic living expenses, a small but growing segment of the finance industry is encouraging consumers to pay their mortgages, car notes, student loans — and even alimony — online by credit card.

Those who pay their card charges in full each month may find that the practice provides a slew of card incentives while buying extra time to come up with the cash.

Paying recurring monthly bills with plastic however, could drive the debt-ravaged consumers who may be tempted by the option deeper into debt and push the sub-prime loan crisis onto the credit card industry.

"Given the current economic situation, we'd advise anybody who really depends on occasional credit to avoid this service, because it's an accident waiting to happen," said Travis Plunkett, the legislative director of the Consumer Federation of America.

Using a credit card — which is essentially borrowed money — to repay borrowed money violates a basic tenet of financial well-being: Never borrow from Peter to pay Paul.

Over the last year, however, the credit card industry and a small group of entrepreneurs have been working to punch holes in that widely held wisdom.

For a fee of $4.95 per transaction and 2.3 percent of the bill amount, ChargeSmart, a new online bill-payment company headquartered in San Francisco, allows consumers to pay mortgages, auto loans and leases, student loans and utility payments by credit card.

ChargeSmart isn't targeting distressed borrowers, Chief Operating Officer Philip Mikal said. Of the 1,000-plus transactions that have been processed since the company launched in July, only 1 or 2 percent involved delinquent accounts, Mikal said. Some lenders, he said, are refusing payments without first talking to customers whose accounts are many months behind.

Mikal said the bulk of ChargeSmart customers were savvy spenders who were looking to maximize their card-reward programs. Some use zero-interest-rate cards; some are salespeople or small-business owners with irregular incomes, who see ChargeSmart.com as a way to manage their cash flow better, Mikal said.

ChargeSmart's main competitor, BillCharger of New York, offered similar online services but also provided card payments for insurance premiums, rent, alimony, property taxes and other bills that traditionally don't accept plastic.

After launching in April as the "only service of its kind," BillCharger quietly suspended operations earlier this month "while we work on tweaking the business model," company founder Andrew Fisher said.

BillCharger's rocky start "is indicative of the challenges faced in bringing a new payment service to market," Mikal said.

He should know. Last year, Mikal co-founded CardIt, another start-up that permitted mortgage payments by credit card. CardIt folded three months after its September debut because of funding problems.

American Express, which OKd card payments of luxury rentals in 2003 and luxury condominium down payments in 2006, was the first card issuer to embrace mortgage payments when its Express Rewards Mortgage program began in May 2007.

Qualified cardholders paid $395 one-time fees for the chance to charge monthly mortgage payments, which could earn card incentives such as membership rewards, cash back and airline and hotel points.

Unfortunately, the first lenders to offer the option were American Home Mortgage and IndyMac Bank, both of which became casualties of the sub-prime mortgage crisis.

American Express is working to "carefully evaluate the future of the Express Rewards Mortgage program and determine next steps," said Sarah Beron, a company spokeswoman.

These setbacks may have slowed the expansion of credit card payments into nontraditional areas, but experts say they won't stop the migration.

Earlier this year, MasterCard lowered its merchant rate structure for the insurance, rental and utilities fields after noting increased consumer and business demand for card acceptance.

"We're very pleased with the merchant reaction. We're bringing on new acceptors all the time," said Stephen Carnevale, the vice president of U.S. commerce development at MasterCard Worldwide.

With the U.S. credit-card market relatively mature, card issuers that are looking for growth areas have targeted bill payment as one of the least explored, said Ed Kountz, a senior analyst at Jupiter Research.

A Jupiter survey last year found that among consumers who regularly pay monthly bills online, 31 percent preferred one-time direct transfers from a bank account compared with 12 percent who preferred using credit cards. The top reason for using credit cards was to earn card rewards and avoid late fees, Kountz said.

On its Web site, ChargeSmart.com uses a creative math calculation involving a fictitious customer named "Greg" to show the potential benefits of using the card payment service.

It estimates that after making a $6,574 mortgage payment on ChargeSmart for a charge of $152.87, "Greg" will "see a monthly gain of $21.39" after estimating the monetary value of airline reward miles and of delaying his cash payment.

After reviewing the calculation, Ken McEldowney, the executive director of Consumer Action, a San Francisco-based watchdog agency, said the calculation was confusing and overstated the value of the airline miles and the benefits of the transaction.

"I'm having a lot of trouble with the math," McEldowney said. "Unless I'm missing something, the only type of consumer that would see any worth in this is someone who is totally strapped and desperate and willing to pay a really high fee to charge a mortgage payment or utility bills as sort of a last-gasp effort."

Mikal said, however, "That is not the kind of customer that we're targeting."

Interest rates to dip for some student loans

Starting today, the interest rate on some newly disbursed student loans will begin to fall. But the rate cut, which partially fulfills a pledge made by House Democrats, has more footnotes than a college term paper.

Not all student borrowers will qualify. Those who do will save, at best, around $14 to $19 a month when they begin repaying their loans, according to two estimates.

In the months leading up to the 2006 congressional elections, House Democrats promised to "cut student loan interest rates in half" for federally guaranteed parent and student loans. What they settled for was substantially less.

The rate cut applies only to new subsidized Stafford loans for undergraduates, which go to students with financial need. On a subsidized loan, the government pays interest while the student is in school, so the rate cut will have no impact until the student leaves school and starts repaying the loan.

The interest rate on this particular loan will fall by half - from 6.8 percent to 3.4 percent - in stages over five years. After that, the rate goes back to 6.8 percent.

When the student starts repaying loans, the rate on each loan will depend on when it was taken out. The rate will be:

-- 6 percent on loans disbursed between today and June 30, 2009.

-- 5.6 percent on loans disbursed from July 1, 2009, to June 30, 2010.

-- 4.5 percent on loans disbursed from July 1, 2010, to June 30, 2011.

-- 3.4 percent on loans disbursed from July 1, 2011, to June 30, 2012.

-- 6.8 percent on loans disbursed after July 1, 2012.

Students who start college this fall and qualify for subsidized loans all four years will save the most. Students who are already in college will get smaller benefits because their existing loans will remain at their old rates.

Home loan and tax benefits

There are some tax benefits available on home loans. The tax benefits can be claimed on both the principal and interest components of a home loan as per the Income Tax Act. These deductions are available to assessees who have taken a loan to either buy or build a house, under Section 24(b).

Tax benefits on interest component
If these conditions are met, interest on borrowed capital is deductible up to Rs 1.5 lakhs
Loan is taken on or after April 1, 1999 to buy or build a property. The purchase or construction should be completed within three years from the end of the financial year in which the loan was taken. The bank extending the loan should certify that interest is payable against the loan advanced to buy or construct a house.
If these conditions are not met, the interest on the loan is deductible up to Rs 30,000 only. However, these conditions have to be fulfilled then:
The loan should have been taken before April 1, 1999 to purchase or construct the house. It could have been taken on or after April 1, 1999 if for reconstruction, repairs or renewals of a house. If the loan was taken after April 1, 1999, but the construction is not completed within three years from the end of the year in which capital is borrowed. In addition to these, the principal component of the loan is eligible for a deduction of up to Rs 1 lakh under Section 80C from assessment year 2006-07 .
The maximum deduction permissible in a financial year on the original loan plus on any additional loans taken is Rs 1.5 lakhs. Hence, if your deduction on the existing loan is less than Rs 1.5 lakhs, you can claim further benefits from an additional loan, subject to an upper limit of Rs 1.5 lakhs in a financial year.

It is to be noted that the tax benefits under Section 24 and deductions under Section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits on the amount supposed to have been paid. If a person buys a house and sells it within the same year or after three years, and if any profit is made, a capital gains tax liability arises on the profits. For example, if a person purchases a house for Rs 55 lakhs with a loan and sells it in the same year for Rs 75 lakhs, he makes a profit of Rs 20 lakhs.
On this profit, he will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after three years, a long-term capital gains tax liability would have arisen. Long-term capital gains are exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax-saving bonds or in a house as specified under Section 54. According to the Income Tax Act, only the person who has taken the loan can claim tax rebates.
Tax deductions can be claimed on home loan interest payments, subject to an upper limit of Rs 1.5 lakhs for a financial year. Interest on a fresh loan can be claimed as a deduction, subject to the upper limit. The interest on a loan, taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 1.5 lakhs.
A husband and wife, both of whom are taxpayers with independent income sources, can get tax deduction benefits on the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken against their names.
If it is proved that a home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, the tax benefits will not be allowed, and benefits previously claimed will be clubbed to the income and taxed accordingly.

NAB increases home loan interest rates

NATIONAL Australia Bank has become the latest bank to turn the screws on homeowners, hiking its standard variable rate by 15 basis points to 9.61 per cent.

The new rate, which takes effect from tomorrow, will add just over $7 to the weekly repayments on a $300,000 mortgage taken out over 30 years.

NAB is playing catch-up to other major lenders who have already pushed through rate hikes.

On Friday the Commonwealth Bank of Australia lifted its rates by 14 basis points, pushing up its standard variable rate home loan to 9.58 per cent per annum and its basic variable rate to 9.07 per cent.

ANZ also pushed through a sneaky 15 basis point rate rise late on Friday afternoon, after the share market closed. ANZ’s new standard variable rate of 9.62 per cent came into effect today.

St George was the first major lender to move in this latest bout of rate hikes, raising its standard variable rate by 20 basis point to 9.67 per cent on July 4.

Meanwhile, AMP Bank also said it would increase its standard variable home loan interest rate for existing customers by 0.20 per cent, to 9.67 per cent. The standard variable rate for new customers will increase by 0.11 per cent to 9.67 per cent per annum. The changes take effect this week.

The banks have once again moved independently of the Reserve Bank of Australia, which opted to keep official rates steady at a 12-year high of 7.25 per cent when it met on July 2.

The banks have all cited higher borrowing costs as the main reason for raising rates. Banks are finding it more expensive to source money for borrowers.The sub-prime crisis - which was sparked when US lenders lost billions of dollars on bad loans - means banks have pay more for the money they borrow to lend to consumers.

Durbin seeks cap on loan interest

U.S. Sen. Dick Durbin (D-Ill.) has taken aim at the high-interest-loan industry, introducing a bill proposing to cap rates charged for payday loans, car title loans and other forms of consumer credit at 36 percent annual interest.

Payday lenders typically charge anywhere from 200 percent annually to five times that figure depending on laws in states in which loans are obtained.

In effect, the bill would sweep aside rates higher than 36 percent annually in states where higher percentages now apply, but would not affect those with lower rates.

Under a 2005 Illinois law payday loans are capped at about 400 percent annual interest, but the law applies only to loans spanning 120 days. Payday loan firms get around the cap by offering loans of 121 days or longer, which allows them to charge whatever they want, in some cases as high as 1,000 percent.
An effort to close the gap in the 2005 law recently bogged down in the state legislature as payday loan firms and other lenders rallied to preserve interest rates that do not exist in a number of other states.

"It won't help consumers or the payday loan industry," said Steve Brubaker, a lobbyist for payday loan firms in Illinois, referring to Durbin's proposal.

If loans are capped at 36 percent annual interest, Brubaker said, many firms will "have to close the lights and go out of business."

The payday loan industry has swelled to over 25,000 stores across the U.S. in the past decade, and it has also branched onto the Internet, including operating Web sites outside the U.S.

In describing problems faced by consumers, Durbin pointed to a Tribune story about a 66-year-old retiree whose $1,000 car title loan ballooned to $4,000 over time. Her loan was at 300 percent.

"These excessive rates are often hidden and can have crippling effects on those individuals who can least afford it," Durbin said in a statement. "Congress must enact protections against predatory lending."

The Tribune series noted that as payday lenders have shifted to longer-term loans, Illinois officials have no idea what the lenders are charging, leaving the industry virtually unregulated.

Illinois is one of a few states that allow auto title loans and, according to consumer advocates, is the only state with no basic protections for people who put their cars up as collateral.

The Tribune's series detailed a major increase in consumers' complaints about debt collectors who purchase old debts, mostly from credit card companies, and file lawsuits against consumers to garnish their wages with the goal of collecting on the debt. The story showed that in some cases people were sued even though their debt had long been paid off.

Durbin pointed out that Congress several years ago imposed a 36 percent annual interest cap on most loans for military personnel and their families.

Lawmakers acted amid complaints that lenders were targeting members of the military services and their families who were struggling under high interest loans.

His effort is likely to encounter fierce opposition from lenders who have faced increased efforts by states to lower payday loan rates. After Oregon's lawmakers lowered the rate there several years ago, most payday loan companies have closed their business in the state.

Consumer advocates praised Durbin's move. "It sets the bar," said Lynda De Laforgue, co-director of Citizen Action/Illinois. "It is really important because it says that this is the direction we are headed."

Durbin's effort coincides with a drive in Congress and from federal regulators to impose new rules over credit cards used by millions of Americans.

The credit card industry has indicated that it intends to fight changes that it says could slash its revenues.