Delaware Passes Law to Limit Instant Loans

Delaware deal made with a handshake
On Wednesday June 27, Delaware Governor Jack Markell signed into legislation a bill regulating the number of instant loans that a single borrower can take out.

Despite objections from the instant loans industry, the bill received bipartisan support and even support from neighboring states across New England since Maryland, Pennsylvania and New Jersey all have banned instant loans.

Instant loans, also referred to as payday loans, are small, short-term financing options that usually have repayment periods of less than 60 days. Since interest rates on these agreements can be massive, many borrowers find themselves repeatedly taking out more loans in order to cover the costs of previous loans.

Prior to the bill, there was no limit to the number of these loans that Delaware borrowers could take out.

“We recognize some people need immediate access to an immediate loan. This bill maintains that choice,” Governor Jack Markell said according to NewsWorks. “Instead of a financial hand-up, though, repeated use of these loans can become a set of financial hand-cuffs. This law helps limit those worst-case scenarios.”

The legislation, House Bill 289, will limit borrowers to taking out five payday loans of up to $1,000 each within a 12 month period. Those five permitted instances will include rollovers and refinances.

The bill also mandates the creation of a database for tracking the number of instant loans a borrower has taken out.

“Payday loans are a stopgap fix to financial problems, not a long-term solution. People who regularly take out or roll over payday loans are in untenable financial situations and desperately need relief,” said Rep. Helene Keeley, one of the bill’s sponsors, according to DeHouseDems. “This bill will hopefully help break that cycle and put people back on the right path. There are many other avenues out there for people facing financial problems – nonprofit groups can provide counseling and assistance, and banks are probably a more viable option for people who need a more long-term solution,” she explained.

According to the state Justice of Peace Court system, 2,400 loan default cases were filed by lenders in 2011.

“The testimony we heard in the Senate on payday lending was compelling and indicated a strong need that something be done,” said Senate President Pro Tempore Sen. Anthony DeLuca, who was also the primary sponsor of the bill in the Senate. “Both the limits on the number of loans a person can take out and the data we hope to develop through this law is a good start in dealing with the issue.”

13 states in the country currently ban instant loans. Additionally, 21 states ban rollovers on these loans.

Follow the Leaders

Delaware may be hoping to mirror other states’ success.

In 2007, New Mexico enacted a law prohibiting rollovers and the consolidation of instant loans. This measure cuts into lenders’ profits since without rollovers payday loans do not achieve compounding interest rates.

The state of Washington has also capped the amount of money that can be borrowed for these loans. By controlling the amount of money that can be lent, Washington lawmakers aimed to limit the amount of debt that a borrower would be liable for.

Similar to the Delaware law, Washington limited the number of loans that can be borrowed in a 12 month period, thus preventing potential cycles of debt for borrowers.

This Delaware legislation came ahead of the bipartisan plan to freeze federal student loan interest rates. It also came ahead of the Supreme Court’s decision to uphold the Affordable Healthcare Act, which required bipartisan votes by Justices.

Hopefully, a continued spirit of bipartisan cooperation can continue to improve the country amid a weak global economy, financial chaos in the European Union, and continued conflict in the Middle East.