New payday loan cap in the US sees ridiculous pawn shop close

Elizabeth Barry 5 January 2017 NEWS

badlands pawn

Badlands Pawn in South Dakota in the US has been forced to close following the state's capping of payday loan interest rates.

A 60,000 square feet pawn shop in Sioux Falls, South Dakota has shut its doors after the state introduced a 36% cap on payday loan interest rates. Badlands Pawn received coverage in the US due to its unique position in the pawn industry. The pawn shop, as well as offering high-interest loans, also had a gun range, tattoo parlour, radio station and space for concerts.

Owner Chuck Brennan, who owns this venue as well as Dollar Loan venues across Sout Dakota, said he didn't expect to have to close his business's doors.

"We were blindsided because we really didn't think we had anything to worry about, but we've reacted as quickly as we could," Brennan told the Argus Leader. "The plain fact is that our main source of revenue in South Dakota is gone."

While the payday loan industry gets a bad wrap in Australia, it is worth sparing a thought for vulnerable borrowers in the US. Australian payday loan laws have gone through numerous revisions to ensure lenders cannot take advantage of borrowers, including setting a 24% fee cap, but the US system doesn't allow payday loans to be regulated federally. This has resulted in stark differences in laws across states in the US.

The lowest annual percentage rate (APR) cap in the US is in Ohio, with lenders not able to charge more than 28%. Other state APR caps extend to 700%. The highest APR cap is 1950% in Missouri, while other states have no cap set, effectively allowing lenders to charge whatever they want.

There was no APR cap in South Dakota prior to the introduction of the 36% cap, with 574% being the average APR charged by lenders in the state. The high repayments allowed businesses such as Badlands Pawn to flourish while vulnerable borrowers were given few alternatives. In the US, you can only apply with lenders from your home state, meaning borrowers cannot apply with a lender operating in another state offering cheaper loans.

As payday loan laws in the US continue to be reviewed, only time will tell whether other lenders that have taken advantage of the high repayments are forced to evolve their business models or bow out of the industry.

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