Fact check: Does Colorado law allow payday lenders to charge over 200% interest on small loans?
Denver, Colo. skyline
October 30, 2018
By Ballotpedia Staff
A Colorado group campaigning to limit charges for what they call payday loans claims that "current law allows payday lenders to charge more than 200% interest for small loans targeted at customers who are often in dire straits."[1] The claim is in support of Proposition 111, a Colorado ballot measure to cap annual finance charges at 36 percent for small-dollar loans.[2]
Is the claim by the group Stop Predatory Payday Loans accurate? Does current law allow payday lenders to charge more than 200 percent interest for small loans?
No, the claim is inaccurate. First, the group’s reference to 200 percent interest conflates interest rates with finance charges. The interest rate is only one of the charges that may be levied on a loan, and Colorado law currently allows four distinct types: 1) a flat-fee origination charge; 2) an interest rate not to exceed 45 percent annually applied to the amount financed; 3) a monthly maintenance fee based on the amount borrowed; and 4) a one-time only charge of $25 for non-sufficient funds (i.e., when a borrower’s check to the lender does not clear).[3]
Second, the 200% interest cited by the group relates to loans that remain unpaid after 12 months. However, just 0.2 percent of the small-dollar loans in Colorado in 2015 were written for one year; nearly 83 percent were written for six or seven months.[4]
Third, what is called a payday loan in Colorado state law and by the group is different from what is typically known as a payday loan, and are actually installment loans. The two are different financial products. A payday loan is typically less than $500 and repaid in a single payment on the borrower’s next payday (or renewed). An installment loan typically involves uniform payments made at regularly scheduled intervals with interest applied through the life of the loan.
Colorado law sets a minimum loan term of six months and caps loans to individual borrowers at $500. No matter the type of loan, the total cost of the loan will be highly dependent on the amount borrowed and the time it takes to repay the loan.
Background
Proposition 111, the Colorado Limits on Payday Loan Charges Initiative, made the November 2018 ballot through petitioning by the issue committee Coloradans To Stop Predatory Payday Loans.[5][6][7] As of September 26, 2018, nearly 97 percent of the committee's donations had come from the Sixteen Thirty Fund, a 501(c)(4) that according to its website "serves as a fiscal sponsor for campaigns and initiatives seeking to change social and environmental policies and promote civic engagement at the local, state, and national level."[8]
Proposition 111, if approved, would cap the maximum authorized finance charge for payday loans at an annual percentage rate of 36 percent.[9]
The initiative states, "The people of this State find and declare that payday lenders are charging up to two hundred percent annually for payday loans and that excess charges on such loans can lead Colorado families into a debt trap of repeat borrowing. It is the intent of the People to lower the maximum authorized finance charge for payday loans to an annual percentage rate of thirty-six percent."[9]
The Meaning of Annual Percentage Rate
The "annual percentage rate" (APR) as applied in the ballot language is defined differently than common usage. In conventional terms, the APR represents the rate of interest paid over the course of a year due to compounding.
However, under federal law, the APR required in loan disclosures must account for the interest rate and fees calculated over a one-year period. The broader calculation was intended to aid consumers in comparing the terms of various loans (i.e., being able to compare a single figure representing various fees and charges over a standard time period rather than comparing different fees, charges and loan periods separately).
The passage in 2010 of Colorado’s Deferred Deposit Loan Interest Rate Bill established permissible terms for small-dollar loans, including:[3]
- An origination charge not to exceed 20 percent of the first $300, plus 7.5 percent of any amount loaned in excess of $300 (but capped at $500).
- An annual interest rate of 45 percent. If the loan is prepaid prior to maturity, the lender shall refund to the borrower a prorated portion of the APR.
- A monthly maintenance fee not to exceed $7.50 per $100 (capped at $30 per month). The maintenance fee may be instituted monthly after the first 30 days of the loan.
- A minimum loan term of six months.
- A maximum on outstanding loans per borrower of $500.
In a typical case, payday loan customers do not borrow for a full year, and the interest charges do not compound. According to state figures, the average loan was $392 for 97 days, with $119.46 in finance charges.[10] Default occurred in 23 percent of the 414,284 loans in 2016.[11]
The Debate
Proponents of Proposition 111 say that high rates for small-dollar loans are predatory and trap borrowers in a cycle of poverty.[1]
Following passage of the 2010 bill on payday lending, more than half of Colorado’s payday loan stores closed. Because small-dollar borrowers commonly use the loans for rent and utilities, a further reduction in availability would either adversely affect borrowers’ quality of life or force them to pay higher costs for different types of access to cash.[4][12]
Jamie Fulmer, the senior vice president of payday lender Advance America, says payday loans are cheaper for consumers than bank overdraft fees or utility reconnection fees. "We have faith in the American consumer, and we think they’re savvy enough to evaluate the different options that are available to them," Fulmer told the Colorado Independent.[13][14]
Conclusion
The group Stop Predatory Payday Loans claims that Colorado law allows payday lenders to charge annual percentage rates in excess of 200 percent. The claim is inaccurate. First, the group’s reference to 200 percent interest conflates interest rates with finance charges. Second, the 200 percent interest cited by the group relates to loans that remain unpaid after 12 months. However, just 0.2 percent of the small-dollar loans in Colorado in 2015 were for one year. Third, the group refers to payday loans when actually describing installment loans. The two are different financial products.
See also
- Colorado 2018 ballot measures
- Colorado Proposition 111, Limits on Payday Loan Charges Initiative (2018)
- Sixteen Thirty Fund
Sources and Notes
- ↑ 1.0 1.1 Stop Predatory Payday Loans, "Home," accessed October 29, 2018
- ↑ Colorado Secretary of State, "Results for Proposed Initiative #126," accessed October 29, 2018
- ↑ 3.0 3.1 Colorado State Legislature, "An Act Concerning the Maximum Authorized Interest Rate for a Payday Loan," May 25, 2010
- ↑ 4.0 4.1 Attorney General of Colorado, "Colorado Payday Lending — Demographic and Statistical Information," August 22, 2016
- ↑ An issue committee is any organization or group of people with a purpose of supporting or opposing any ballot item that has accepted or made contributions or expenditures in excess of $200 or printed 200 or more petition sections.
- ↑ Colorado Legislative Council Staff, "Overview of Colorado Campaign Finance and Disclosure Requirements," November 8, 2016
- ↑ Colorado Secretary of State, "2017-2018 Initiative Filings, Agendas & Results," accessed October 29, 2018
- ↑ Sixteen Thirty Fund, "Home," accessed October 29, 2018
- ↑ 9.0 9.1 Colorado Secretary of State, "2017-2018 Initiative #126 Final Clean," February 9, 2018
- ↑ Attorney General of Colorado, "2016 Deferred Deposit/Payday Lenders Annual Report," accessed October 29, 2018
- ↑ Center for Responsible Lending, "Payday Lenders Continue to Put Coloradoans Into High-Cost Debt," accessed October 29, 2018
- ↑ Consumer Financial Protection Bureau, "Payday Loans and Deposit Advance Products," April 24, 2013
- ↑ National Council of State Legislatures, "Advance America and Payday Lending: Who Borrows and Why," October 18, 2012
- ↑ The Colorado Independent, "Proposition 111 could crush payday lending in Colorado," October 19, 2018
Launched in October 2015 and active through October 2018, Fact Check by Ballotpedia examined claims made by elected officials, political appointees, and political candidates at the federal, state, and local levels. We evaluated claims made by politicians of all backgrounds and affiliations, subjecting them to the same objective and neutral examination process. As of 2025, Ballotpedia staff periodically review these articles to revaluate and reaffirm our conclusions. Please email us with questions, comments, or concerns about these articles. To learn more about fact-checking, click here.
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