A voter initiative in South Dakota to cap payday loan interest rates at 36% will be on the state’s ballot next year despite complaints from payday lenders that it will put them out of business.

Payday lending in South Dakota is currently unregulated, leading to annual interest rates of up to 574%, among the highest in the nation according to a 2014 study by the Pew Charitable Trusts.

South Dakotans for Responsible Lending, which led the initiative campaign, said the law will curb predatory lending but opponents believe the measure is meant to put short-term lenders out of business . 

They argue that a $500 loan paid off in two weeks would earn just $6.90 at a 36% interest rate, which is not enough to cover the risk of the loan. A state judge in June rejected payday lenders' demand that the ballot language be rewritten.

Most payday lenders don’t recover payments on time and high interest rates add up quickly. The controversy led to the formation of South Dakotans for Fair Lending, which circulated a competing ballot initiative, capping interest rates at 18%, unless the borrower agreed to a higher rate in writing.

"These lenders offer a defective financial product intentionally designed to be a debt trap,” South Dakotans for Responsible Lending states on its website. "The average payday loan borrower repays about $800 on a $300 loan because most borrowers simply cannot repay these short-term loans on time. As a result, borrowers are forced to take out another loan (and then another) just to pay the interest on their original loan. We find it unconscionable these types of lenders have targeted those least able to pay their exorbitant fees and interest, namely those with low-incomes, the elderly, veterans and others living on fixed incomes.”

The 36% cap could indeed hurt payday lending in South Dakota based on what’s happened in other states with a cap. The 2014 Pew report states: "In the 15 states that prohibit payday lending or interest rates higher than 36%, there are no payday lending stores.”

Half of payday lending stores in Colorado reportedly closed after the state capped interest rates on short-term loans at 45%. Meanwhile, payday lending is booming in states such as Nevada and Wisconsin that have no rate caps. Some states, including Rhode Island, Vermont and Massachusetts, ban payday lending, according to paydayloaninfo.org, which groups short-term loans under "small loans" laws that typically have interest rates in the low teens.

If the state's initiative passes, any loans that violate it will be legally unrecoverable. Recently, South Dakota-based Dollar Loan Center tycoon Chuck Brennan announced plans to go into a new line of work. He opened Badlands Pawn last month, which he promised will be the "Disneyland of Pawn Shops," with a shooting range and concert stage. Pawn shop loans in South Dakota are unregulated by the state and are left under municipal jurisdiction.


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