An initiative going before voters this fall would put stronger restrictions on the controversial payday loan and title loan industries, to the point that industry representatives say it would put their stores out of business.

And that's not a bad thing for those who think the companies are little more than modern-day loan sharks.

The ballot measure would cap the interest rate lenders can charge at 36 percent. Currently, fees charged by payday lenders average out to 400 percent APR - a rate supporters of the initiative say traps people in debt.

"Four-hundred percent is absolutely too high," said Tom Jacobson, executive director of Rural Dynamics, a Montana consumer credit counseling service. "It's too high ethically. It's too high financially. Once we can get this capped at 36 percent, we are going to help people become better long-term consumers."

But Bernie Harrington, an industry spokesman who owns six payday loan stores in Montana including EZ Money Check Cashing on Bozeman's Main Street, says the 400 percent figure is misleading.

Unlike traditional loans or credit card charges, payday loans don't accrue interest. Rather, state law allows these lenders to charge a one time fee that is 25 percent of the principal amount. In other words, a $100 loan can cost $25. The largest loan allowed by law in $300, which can carry a $75 fee.

For cash advances, borrowers typically get the loans by writing a check for the loan amount plus the fee charged by the company, post-dated for two weeks later. When that date comes up, the company cashes the check. If the check bounces, companies are allowed to charge another $30.

But Harrington said more than 97 percent of the time, the check clears at his stores.

In those cases, Harrington argues, payday loans are a better deal for customers than other options facing them, like bouncing a check or incurring late charges from rental companies.

"You don't have to look very far to find out that the cost of credit goes up for the consumer when we go away," he said.

But supporters of the initiative say borrows of the loans feel pressured into taking out new payday loans to payoff the old ones, which puts them into a "cycle of debt."

As evidence, they point to a law passed by Congress in 2006 that prohibited members of the military from taking out loans with interest rates higher than 36 percent. The law followed a report that found service men and women were becoming security risks given the indebtedness brought on by high-interest loans.

Troops were "losing security clearance," Mike Hayden, a retired Air Force colonel said. "That was becoming problematic in fighting the global war on terror."

And supporters refute the idea that payday loans are the best option when the going gets tough for people. They point to a program by Montana credit unions that offers short-term loans specifically designed to offer an alternative to payday lenders for people with bad credit.

To that, Harrington said that if the credit unions offered a truly a cheaper alternative to his businesses, then the free market would put him out of business.

As it is, Harrington said I-164 passing would mean the end of stores like his. The 36 percent cap would mean he could make at most $1.38 for a $100 loan.

"I'd have to do 8-to-900 loans just to pay the fees from the (Montana) Division of Banking," he said. "That's before I pay employees or the lights or any other bills."

Daniel Person can be reached at or 582-2665.



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