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Hawaii becomes the latest state to put new restrictions on payday loan rates and repayment methods

CNBC logo CNBC 6/18/2021 Megan Leonhardt
A photo of Hawaii Governor David Ige speaking at a community meeting in 2018. © Provided by CNBC A photo of Hawaii Governor David Ige speaking at a community meeting in 2018.

Hawaii Governor David Ige signed a bill into law on Tuesday that will cap interest rates on payday loans at 36% within the state. 

But this new law, which will take effect Jan. 1, 2022, goes beyond just capping the maximum interest allowed. It will also force the licensed payday industry to offer installment loans in place of traditional payday loans with a single payoff due two weeks after an amount is borrowed. 

"We do believe that this measure will be better for consumers, as well as better for payday lenders all across the state of Hawaii," Ige said during a press conference Tuesday. "Consumers will have a chance to repay small consumer loans in installments that they can afford, while payday lenders will see a clean-up of the industry as those good businesses in our community will be able to operate in a more fair and appropriate manner."

These small-dollar consumer loans, which can amount to a maximum of $1,500 under the new law, will be repayable over the course of two to 12 months, depending on the size of the loan, as opposed to the traditional two weeks.

Annual interest rates are capped at 36% under the new Hawaii law, but lenders are allowed to charge a monthly fee of up to $35 depending on the size of the loan. However, total fees cannot exceed more than half the original amount borrowed, according to an analysis by Pew Charitable Trust

"Under the new law, small installment loans will cost consumers hundreds of dollars less," writes Nick Bourke, Pew's director of consumer finance. "It will make these small loans available with appropriate protections and incorporate proven policies that have garnered bipartisan support in other states."

Prior to the new legislation, payday lenders in Hawaii charged annual percentage rates of up to 460%. That means to borrow $500 over four months, a customer would pay $700 in finance charges. Now, customers will pay $158 in finance charges, according to Pew's calculations. 

As the bill made its way through the Hawaii state legislature, lenders were split on the measure, according to Hawaii news outlet Honolulu Civil Beat. The parent company of local payday chain Money Mart voiced support of installment loans, but Maui Loan Inc. opposed the measure.

With its new law, Hawaii joins Illinois and Nebraska as states who have recently passed payday lending reform measures. Nearly 20 states, along with Washington D.C., impose a 36% rate cap on payday loan interest rates and fees. 

Federal lawmakers introduced similar legislation through the Veterans and Consumers Fair Credit Act in November 2019 that would cap interest rates at 36% for all consumers nationwide. The legislation — which is the latest attempt to curb payday loans at the federal level — was built off the framework of the 2006 Military Lending Act, which capped loans at 36% for active-duty service members.

Despite both Democrat and Republican co-sponsors when introduced, the bill remains stalled, forcing states to push ahead with local legislation.

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