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Indiana Senate Bill looks to limit interest rates on small loans

INDIANAPOLIS (WPTA21) — A bill making its way through the Indiana legislative process aims at changing the limitations on finance charges on small loans.

Senate Bill 104 would prohibit making a small loan with a greater rate or amount of interest than allowed under a state statute.

The Federal Trade Commission said many consumers in need of quick cash turn to payday loans, short-term, high-interest loans generally due on the consumer’s next payday.

The FTC said in these types of loans, a borrower writes a personal check for the amount the person wants to borrow, plus the fee they need to pay for borrowing.

The loan is due on the next payday. The FTC said the fees on the loans can be a percentage of the face value of the check or based on increments of money borrowed.

These can get expensive. The FTC gave an example of a $100 loan for two weeks. The borrower writes a check for $115, which the lender holds. When the bill comes due, the borrow either pays the $115 or rolls over the loan for an additional $15 charge.

The FTC said this would make the cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent.

A fiscal note filed Thursday said the bill would change the limitations on finance charges on small loans to an annual rate of 36 percent. Currently, applicants can borrow up to $605 for two weeks at 20 interest. This would add up to an annual rate reaching 391 percent.

The Indiana Institute for Working Families applauded the bill, saying vulnerable families should be protected from these types of loans, which they call predatory.

“It’s very clear that there’s a perverse incentive in this model,” said Erin Macey of the Indiana Institute for Working Families. “Borrowers who will not have enough left over to meet their basic needs make better targets than those who do.”

The 36 percent rate cap is the same passed in 2006 by Congress limiting interest rates for active duty military and their family.

“If it’s good enough for our active army – the people that protect you and keep you from harm’s way day in and day out – it should be good enough to protect citizens,” retired Brigadier General Jim Bauerle of the Military from the Veterans Coalition of Indiana said.

The bill was voted through the Senate Committee on Insurance and Financial Institutions with a 6-2 vote. It will now proceed to the Senate floor.

Jacob Burbrink

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