Why is any Interest Rate over 25% legal?

[Coexist]

10 - 20% used to qualify you as a "Loan Shark".

Why is there not federal legislation limiting interest rates? This is getting beyond absurd - it is dangerous. It is lethal quicksand, swallowing lives up whole. It has GOT TO STOP.

What is considered an excessive rate of interest should be set at a national level; not left to individual states. What used to be a risk-assessment (higher rates to people with bad credit) has become a free for all - people with good credit who are never late, are getting their rates jacked up for no good reason.

Who among our leaders will take a stand? Should we begin a phone call campaign to make it part of the Homeowner Legislation rumored to be the next thing on Obama's agenda to save our economy?

[leftofthedial]

1. I dunno. Call Joe Biden and ask him.

[wroberts189]

38. And you would think the least wealthy Senator would have a bit more empathy.

I'll never forgive him for that.

[truedelphi]

42. Unfortunately Biden is more heavily connected with all the credit card companies

Than almost any other Senator. He is their darling.

[leftofthedial]

55. well, he's gotta pay for all that dental work somehow.

that and the Viagra.

[Trajan]

2. Didn't they change that in the 80's ?

I seem to remember they lid being removed from interest rates in the 1988-89 time frame ...

Hopefully someone knows more ...

[mrcheerful]

7. One state did it, I think it was SD to help the state with loses in the cattle industry.

After the supreme court decided to allow it, all credit cards now are based in SD. PBS Front Line did a program on the credit card scam. Because the credit cards are from SD state laws in other states are bi passed leaving credit card companies free to charge any rates they feel and able to increase rates for no reason.

[Synnical]

14. Yup, here's the PBS link

http://www.pbs.org/wgbh/pages/frontline/shows/credit/eight/

. . .

» There is no federal limit on the interest rate a credit card company can charge.

If you've ever looked at the return address on your statement, you may notice your credit card issuer is located in a state such as South Dakota or Delaware. That's because these are the states that have either weak or no "usury laws" meaning there is no cap on the interest rate that is charged. (View this map that shows the states where the top ten credit card issuers are located.) The federal government once had national usury laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed them and some states put no new usury laws in place. That's why Citibank, the issuer of Mastercard, moved to South Dakota, which has no cap on interest rates. (For more on the South Dakota story and how the credit card industry took off in the 1980s, read The Ascendancy of the Credit Card Industry.)

. . .

[Greyhound]

30. Yes. Delaware is the state that makes hostile takeovers nearly impossible

and allows corporations to operate virtually unregulated.

Our Veep's constituents.

[JerseygirlCT]

21. Yes I remember that now

So this would need to be changed at the federal level then.

[jmowreader]

62. Delaware followed South Dakota's lead

My guess is, after Delaware (once the home of all the credit card companies) started to see companies close up to move to SD, they changed their laws to match SD's.

[hack89]

Limits on interest rates reduces the pool of people able to borrow

because you have done nothing to reduce risk to the lenders.

[Coexist]

5. no - 25% is a HUGE interest rate - and people who are very low risk

are now getting hit with these astronomical and unfair rates.

[regnaD kciN]

13. But, you see...

...if you get hit with such rates, you automatically become "high-risk" (because, with the higher monthly payments they're charging you, it will be harder for you to make ends meet, and thus more likely you'll file for bankruptcy). Ergo, since you're now high-risk, such rates are justified!

:sarcasm:

(And, by the way, for those tempted to write "Simple -- don't go into debt," that's excellent advice for those starting from scratch, there are millions upon millions of people in this country who are already so far in debt, it will take them years to pay it off even if they cut their living expenses to the bone and spend every penny on debt payments, especially when their creditors then yank up their interest rate from, say, 10% to 25%. Telling those people "well, you shouldn't have gotten into debt in the first place" is a little like telling a newly-unemployed person that "well, if you'd been a better worker, you'd still have your job.")

[JerseygirlCT]

58. That would be me.

Only means I'm going to use that card less, b/c they've pissed me off. Fewer merchant fees coming their way, I suppose.

[Trajan]

12. Awww ... The poor lenders ....

So let me get this straight: There are different levels of risk, and because of that, there must be greater levels of interest rates available in order to justify extending credit to those of higher risk ....

First: If someone is at risk of NOT paying their loan, then how does their risk 'improve' when they are charged a higher interest rate ?

Second: Why expand the pool of available borrowers when that allows those who are unable to pay into said pool ?

Third: Isnt it amazing ? ... For every organization that GOUGES or DEFRAUDS American citizens, there is always a willing DUer available to kick in and argue on their behalf ...

FUCK the credit card companies .... I have no problem with instituting LIMITS on interest rates ...

[hack89]

15. They play the odds

they group people by risk. Each group has a different default rate. The higher the default rate the higher the interest rate charged that group - that way the lenders don't lose money on the group as whole.

You can not force credit card companies to give away money - they will simply stop giving credit to people that presently can get it. Basic economics as far as I can see.

[JerseygirlCT]

24. Interesting idea, but I don't think that's how it's working now

I was just rate-jacked - on a card I've held for 25 plus years - one that has always been fully paid every month.

So exactly which risk pool am I in that allows them to make my rate sky-high? It's the hope like hell they run into trouble so we can hold them up for that 20-something percent rate we've just tossed on them plan, I think. A result of their own risky behavior, not mine.

[hack89]

33. The financial collapse has screwed up all their assumptions

the default rates for all risk groups are skyrocketing as people lose their jobs. They are desperately trying to break even (and they are failing badly at that.)

Credit card companies are fighting for their very existence - your are right that it was their own risky behavior that got them in this mess. I don't thinks that means anything to them.

[JerseygirlCT]

52. No, you're right, I don't think it does. nt

[Raineyb]

71. They consider you a deadbeat

That's the terminology the CC companies use for people who do not carry a balance.

As to the outrageous rates, if I as an individual charged these kinds of rates they'd lock my ass up as a loan shark. Why is it that the same terminology isn't used for these rapacious banks?

Regards

[JerseygirlCT]

73. Well, proud deadbeat I am, then.

And they won't be making any greater amount from me!

[MattBaggins]

34. That's the most unbasic economic nonsense I have ever heard.

how can you claim that having various tiers is OK and needed. If tier one can pay eliminating tier three should have no effect on them unless the real problem is greed. So you are all hunky dory with one group being shafted so your credit is OK? What the hell is basic about any of that?

[hack89]

37. What to you think lenders use your credit score for?

to rank borrowers into tiers. If they are forced to lose money on any given tier than that tier will not be given credit. That is the way it works - if you have a good credit history you get a better deal. Why should I have to pay more to borrow money if I have taken the effort to be responsible?

[MattBaggins]

40. Your method suggests you think

it is a good idea to have other people forced to bend over so you can have your precious lower rate. You should not be charged a higher rate nor should yours be kept lower at other peoples expense.

If your rating is so good and you have thrifty then the other tier should have no effect on you. I can not understand your idea that they need to be jacked to benefit you. That this robbery is "basic economics" is a strange idea.

[hack89]

43. I am just describing reality

you don't have to like.

They aren't being jacked to benefit me. They are being jacked to benefit the credit card company - their goal is to make money. They are competing for my business - they know that I am a low risk. Low interest rates is how they get my business.

[MattBaggins]

44. Good you used your brains and managed your money wisely.

I also have a 800+ rating and have no debts other than my mortgage. I have my cars paid off and my student loans paid off. I pay my one credit card bill fully each month and have enough money set aside to tell the bank that holds my mortgage to go to hell if I choose; so I'm not a "sour grapes" guy who got himself in trouble.

I am sorry if I misunderstood you but it seemed as if you thought a "sucker" tier was needed for the credit industry to function.

[JerseygirlCT]

54. I don't think that's at all what was being said

people like you (and me) have been smart about how we used the credit we were given. So we're a lower risk, and the customer that the companies want to keep. So we (usually) get lower rates. Those in a different position, who have not been so responsible, are a higher risk - and higher rates are the result for them.

[JerseygirlCT]

53. I'm not sure I understand your argument here

That those who have not used credit responsibly shouldn't have any different access to credit going forward? That they ought not to see the results of their bad choices?

There are certainly people who find themselves in a bad spot through no fault of their own. Emergencies happen, illness happens. But too often, so does easy credit and not enough concern for paying bills on time, or prioritizing personal spending. (Questions like do you need or want that?)

All that's being said is that those extending credit look at how those to whom they're extending it to see how good or bad a risk they are. If they're not as good a risk, then higher rates are the price that's paid. Good risks earn a better rate.

This is pretty basic.

[MattBaggins]

56. Why do you except that as the way it should be?

It boils down to who you want to encourage in a solid stable credit market. The goal is supposed to be discourage stupid use of a credit card. A holder should stop and think before they take the card out for something stupid like a trip to Vegas. That is supposed to be the goal; to make sure that one is certain they really need something before they charge it. So why should my neighbor have to pay 18% in an emergency that requires us too overcharge on a card, where as I only pay 9%? It makes no damn logical sense to say that certain groups need to be preyed upon with idiotic rates instead of limiting the amount they can access. Why set people up for failure if you know they will caught in a debt cycle?

The other part is the BS of changing rates after the fact. I could see informing the customer that future transactions will be penalized if they are missing payments and still charging to the card. This nonsense of making it retroactive even going so far as to snoop into a customers other bills and hit people for being late on a phone payment. Don't forget that they will try to lower your scores if you have the audacity to try and cancel a card with them. I might see their point of view if they were being smart and lowering the rates on pre-existing balances to recover more potential losses and used the high fee/penalties to discourage future abuse of credit.

What they are doing is predatory and beyond the pale. It is about greed and in no way reflects an intelligent way to slow out of control credit use.

[JerseygirlCT]

57. Totally agree they're predatory, totally agree that retroactive

increases are wrong.

But remember, the goal of the credit card company (bank) isn't to encourage responsible credit use at all. Their goal is simply to make money. They hedge their bets by attempting to attract low-risk business with lower rates, and to make those with higher risk buy their credit at a higher rate.

It would be nice if what they were after is urging responsible use - that's an appealing idea, isn't it? But it's just down to making money for them. You and I make them money on merchant fees, but not on interest. But we're very low risk - we most likely won't end up defaulting on any of our credit, so it's worthwhile to just let us ride and collect those merchant fees.

But now they've found they've allowed too many of those high-risk customers in - and to attempt to recoup their own bad choices, they're jacking up the rates for the likes of us. Which probably won't matter - unless they get lucky and catch us in a bad spot. Then it's going to cost us a lot and make them a lot.

I'm not at all saying this is a good system; it's just the way it is. These aren't really human beings we're dealing with - it's corporations. Sensible isn't part of the equation, you know?

[wroberts189]

41. Not only that...

They are unsecured loans ..so why are they not taking the risk that goes with that?

They got your whole credit life history in the palm of their hands and can hurt you very bad.


What a deal.

[Telly Savalas]

45. While this is true, is it really responsible for the lender

to hand out an unsecured revolving line of credit to a class of people who have an expected default rate which is so high that a 25% interest rate is needed to get a reasonable return?

It's a scorched earth business model by the lenders which sets people up to fail.

[Two Americas]

64. that is just not true

Only if we think that the "financial industry" actually is an industry, only if we think that the producers should be subordinate and subservient to the investors, only if we think the economy should serve the investors rather than the other way around, only then are these "free market" arguments valid.

The dire warnings that we get every time we advocate regulation of banking and finance are all false. Every day you disprove this idea when you eat. Since the New Deal, credit in agriculture is strictly regulated, and all who want to farm have access to credit. The bankers have a stable and profitable business. The people have access to food. Today, the farm credit people are doing much better than the rest of the banking and financial sector. They do not make millions and billions and trillions. Nor should they. They are not producing anything, they are merely providing a service - like window washing. They are far less vital than teachers, nurses and EMT workers.

The farmers are farming, the eaters are eating, and the bankers are making a decent and honorable living in a stable business environment - serving the community, not forcing the community to serve them. Those are the "dire" things that can happen when banking and finance and investment are strictly regulated and when the people in that business are obliged to support the people, rather than being able to force the people to support them.

Prosperity, productivity, security, fairness and decency, stability, and thriving communities - those are all attainable when finance is regulated and not allowed to control our lives and our country. This is not mere theory. The New Deal proved the practicality of this solution. For the Cliff's Notes version, watch "It's a Wonderful Life."

[remoulade]

3. Chargine interest at any rate violates Biblical instructions. Doesn't seem to stop

people, probably including some Christians, from doing it.
:shrug:

[Donnachaidh]

4. Lenders who charged these amounts in the past were called

LOANSHARKS. And they were subject to RICO laws.

The only thing missing from banks and credit card companies now are the strong arms called Vinnie who would visit their customers and do a little physical *persuading* to get you to pay the bill.

[regnaD kciN]

9. Oh, they've still got them...

They're now called "collection agencies."

[Donnachaidh]

25. not really. Vinnie would rearrange body parts

Haven't seen a collection agency do that YET.

[ComtesseDeSpair]

6. I've been wondering that same thing...

I think I'll write my good friend Barack and tell him to do something about it. :)

[regnaD kciN]

8. Why do you hate our Free-Enterprise System...?

:sarcasm:

[flvegan]

10. Loan sharks are 10% per WEEK, not APR.

Not that I'm remotely justifying such usurious rates as 25%. I find that abhorrent.

[Coexist]

22. thanks - you are correct.

[Warpy]

11. The original 18% is adequate to compensate for high risk, short term unsecured loans

to people without collateral for blowing on things like a once in a lifetime vacation where there is nothing to seize in case of default.

The SBA was set up to provide business loans at a much lower interest rate, but we all know how corrupted that agency has become over the years by cronyism and quid pro quo arrangements at the local level. Credit cards were never to be used for that purpose, but they have been since the late 70s as the SBA turned into a cesspit and banks weren't forthcoming.

The sky is now the limit on credit card interest rates and people who carry a balance are now at extreme risk.

Congress needs to step back in with anti usury laws and to revamp the SBA so that it goes back to its intended purpose, providing short term microloans to small businesses.

If that means credit cards will only be issued to the upper middle class, so be it. Let them deal with the headaches those things cause.

[regnaD kciN]

16. But that's a major revenue stream for the banks...!

A few months ago, I made a "modest proposal" for a bank bailout: since it is estimated that there is around $900b in total credit-card debt carried by U.S. citizens, the government should dedicate that amount (less than the trillion the banks are currently requesting as a no-strings gift from the government) to a unique offer -- give any American the ability to pay off all their credit-card debt, on the condition that they cancel all their cards and are prevented from applying for new ones for seven years. The banks would get all their "toxic" credit-card debt taken off their books, debtors would be free from their (monetary and mental) burden of massive monthly payments and be required to learn how to "pay as you go," and, with so much money freed up from going towards monthly debt payments, much of that money would flow into the economy, raising employment and lifting us out of the recession.

What's not to like?

Well, for the banks, plenty. For, while they may moan about their "excessive risk" from having billions of potentially uncollectable debt from credit cards, the fact remains that they get a huge amount of their revenue stream from just such "bad debt." Nothing like collecting 25%-30% interest on debt they've already paid out, is there? Think of it this way: if a debtor continues to make minimum payments, and doesn't charge anything new, it will take them 8-10 years to pay off their debt. In the first four of those years, the amount they pay in interest will, essentially, pay off the principal of that debt. The bank is now covered -- they've got their original loan back, just from the interest already paid. Anything from here on in is pure profit -- and that includes the next four to six years of sky-high interest, plus the principal still (theoretically) owed them!

Although banks may whine about the "risk" such loans put them at, should they be paid off in an instant, the bank has lost all that remaining profit "due" to them -- money that they have become dependent on. What banks really want is a ton of "high-risk debt" loans out there, so they can charge massive interest rates. Just not "high-risk" enough that there's a chance that the debtor will choose bankruptcy. All the bank practices you see are designed to keep people right at that limit, where they can "just barely" get by, but won't be tempted to "give up" and file bankruptcy.

As I wrote, several times, in the past, as an update to the old Tennessee Ernie Ford song:

You work sixteen hours (a day), and what do you get?
Another day older and deeper in debt.
St. Peter, don't you call me, 'cause I can't go,
I owe my soul to the Citibank store.

[Coexist]

23. would people, under your plan, be allowed to apply for loans?

did you mean just credit cards?

[regnaD kciN]

46. Just credit cards...

I would allow loans for secured property (houses, cars, etc.) and also (since we don't yet have universal health care) for medical expenses and similar emergencies -- although those would be required to be offered at low interest rates and with a federal guarantee.

[BlooInBloo]

17. Annualized?

[Stellabella]

18. I don't think any interest rate over 10% should be legal.

Those effing bankers and credit card companies have jerked us around long enough. It's time they had strict limits put on their behavior.

[guardian]

47. Why 10%? Why not limit it to 5%? or entirely

prohibit charging interest like sharia law?

How did you arrive at 10% being an upper limit?

[Stellabella]

60. Because that's the highest my mortgage rate has been.

Look, I'm no expert - I'm just throwing ideas out there. The banks should be able to make a reasonable profit, NOT an exorbitant one. There's a reason usury laws were on the books - and a reason the banks lobbied to get repukes to get them off the books.

[Cerridwen]

19. Meet "T.M." Reardon, SD and Gov. Pierre S. du Pont, IV, DE.

Weren't the 1980s just grand...for the new era of robber baron?

First, meet T.M.

In 1979, mortgage loan rates were in the 9 percent range, but increased to 9.75 percent by the fall (on their way to 16 percent). Short-term rates were increasing at an even faster pace, as Regulation Q was being phased out, and the Federal Reserve, under the leadership of Chairman Paul Volcker, made the decision to let rates float. By the time the South Dakota Bankers Association Legislative Committee met in November 1979, it was clear something needed to be done with South Dakota's usury limit so lending rates could keep pace with the rapidly increasing cost of money.

<snip>

People often assume the 1980 Legislature abolished South Dakota's usury limit, but that is not what happened. Instead, the legislation exempted regulated institutions from the usury law. The statute's definition of regulated institutions included all state and national banks. Essentially, the legislature simply said banks could charge whatever they and their customers would agree upon in writing. Federal Reserve Regulation Z, which went into effect a few years earlier, was an important companion to South Dakota's new law because it required banks to accurately disclose the true cost of the borrowing as an "annual percentage rate." Since the penalties for a bank's violation of Reg Z were quite severe, banks were careful to accurately disclose borrowing costs, giving customers a reasonably simple and reliable way to compare offers from competing institutions.

<snip>

While it was not of South Dakota's doing, a critical component to make South Dakota a good place for Citibank to headquarter its credit card operation is the fact that federal banking law effectively allowed Citibank to "export" South Dakota's usury law all over the United States, as long as the credit cards were issued in South Dakota, and the credit granting decisions were being made in South Dakota. This ability to export applied to the interest rate on the card, and later United States Supreme Court cases confirmed that it applied to fees on the card as well. {emphasis added}

Don't miss the Fed and federal banking laws help with what you just read above.

Now, on to Gov. Pierre S. du Pont, IV

The Governor's main inducement is a new comprehensive Delaware law aimed at out-of-state banks. It would grant them a wide range of credit powers, unavailable in most states, that could affect millions of credit card customers.

These powers include the ability to charge interest rates not subject to any legal ceiling, to raise interest rates retroactively, to charge variable interest rates, to levy unlimited fees for credit card usage and to foreclose on a home in the event of default for credit card debts.

<snip>

- The legislation was drafted in private over a period of six months by lawyers for two large New York banks, the Chase Manhattan Bank and J.P. Morgan & Company, without any written analysis by any Delaware official involved.

- Other parties who might have raised questions about the bill, including other state officials, the press and the public, were intentionally kept in the dark, according to bankers and state officials.

<snip to oh, so much more at the link above>

Reardon, Citibank, SD legislature, the Fed, federal banking laws, Gov. du Pont, IV, Chase Bank, J.P. Morgan & Company - the "perfect storm."

[JerseygirlCT]

20. I completely agree. nt

[Smith_3]

26. Cuz telling banks how much interest they can take is pinko stalinism.

:sarcasm:

[spanone]

27. charge 30% on a street corner and they'd call you a loan shark

[Orsino]

28. Because Congress' owners want it that way...

...and we're still too awed by the power of money to demand a cap.

[sam sarrha]

29. same reason any interest rate over 12% is legal. and the answer is greed, Rethuglicans let it happen

so their buddies could get richer and make big campaign contributions

[Cerridwen]

31. One small point of disagreement. They did not "let" it happen.

They worked damned hard to make it happen.

There are a couple of links in my post up-thread with more details if you're interested.

[wroberts189]

50. good point...

That bill was brought up again and again until it passed..


corruption at its finest

[Raksha]

32. K & R

[wroberts189]

35. Were they are not supposed to drop after they raped us with that

bankruptcy bill?

You know the one the credit card companies got to write?


Was that not supposed to lower rates for all? Was that not the argument? Deadbeats abusing the system causing them to be high?????

I have a perfect credit and payment record and citi and discover just tried to raise my rates 5% ...why? and citi got tarp money.

Good thing I noticed cause they were sneaky about it ...putting a change of terms deep inside the junk they peddle in their bills.

knr for outrage

[regnaD kciN]

48. Yep...just like they were supposed to help out debtors after taking TARP money...

...and they raised interest rates and reduced credit limits instead.

When are we going to realize that relying on the "good will" of Big Money is a sucker's bet? :shrug:

[4lbs]

36. You think 25% APR is too much? Try "borrowing" money at a check cashing place.

10% for a two to three week payday loan.

That's 10% for up to three weeks.

That's well over 150% APR for the year if drawn out!

[rucky]

39. It's to protect the creditors and punish those who must somehow deserve it. nt

[guardian]

49. You are misinformed

Loan sharks charge much higher rates. More like 20%-40% PER MONTH. The equates to 300%-400% per year.

[Raineyb]

72. So do pay day lenders

And last I checked, the "loan sharks" don't run those establishments. (If by loan shark you are discussing an individual making loans as opposed to corporate entities.)

Regards

[regnaD kciN]

51. Here's a second "Modest Proposal"...

What about if everybody currently in debt filed for bankruptcy simultaneously?

If you didn't have any assets, and a low enough income level to qualify, make it Chapter 7 and clear away all your debts.

If not, file Chapter 13. Sure, you'll have to pay back some or even all of your debts over five years, but that's the principal on the debt -- essentially, you'll be repaying at 0% interest. With interest rates on credit-card debt currently skyrocketing, you're practically guaranteed a lower monthly repayment sum than what you're getting charged.

"But won't that ruin my credit record?" I hear you ask. Guess what -- under current standards, if you're in debt, your credit rating is already in the toilet. Even with a bankruptcy report on your record, in a couple of years, you should be able to re-establish credit, since you no longer have a debt load. Besides, if most of the country files, what are they going to do? Refuse to issue mortgages or car loans to everyone in America? And if they won't give you a high-limit credit card afterwards, count your blessings -- you won't ever get in that situation again.

That scream you hear is the sound of the banks realizing what would happen to them if, essentially, they lost the "high-risk," high-interest credit-card gravy train...

:evilgrin:

[Cleita]

59. It used to be that any interest rate over 18% was illegal and considered usury.

Only the riskiest loans got that high of an interest rate. The banks seemed to do just fine back then, posting profitable quarters without the screwing of America.

[TexasObserver]

63. You are correct.

There was a time not that long ago when charging over 18% was a basis for cancellation of the debt, under usury laws. At least in some states.

These ridiculously high interest rates and fees they add on are anti-consumer, and wouldn't be allowed if we had real consumer advocates in government's oversight units.

[jmowreader]

61. Because we don't have the balls to set a federal usury rate

I say if you can't run your business at 18 percent interest, with a 22 percent default rate for borrowers who default on THAT card--not "pay your light bill late and we'll run your paid-on-time credit card up to 34 percent"--you're a piss poor manager.

[rocktots]

65. Biden just signed MINIMUM 38% RATES!!

This is a great post and should be addressed. Biden just 'capped' rates at 38%, and there was no outcry. Most in congress are OWNED, and on a 'liberal' forum, this is not debated enough.

[trthnd4jstc]

66. Because the world is run by A$$holes.

[cliffordu]

67. You could just stop using them. Simplify your life.

It can be done.

[defendandprotect]

68. ...because it's "legal" to buy government and legislators . . . !!!

[Fire_Medic_Dave]

69. Because all of our congressmen and senators have a lot of stock in banks.

[tavalon]

70. As much as I like him and I do like him. I have two words for you

Joe Biden.

I believe that in the hell that is about to ensue in the credit card market, usury laws will be fixed.