Governor Bill Ritter of Colorado has recently signed an epic payday loan bill into law. This bill comes in the form of House Bill 1351. This bill will change the normal payday loan structure into a short-term loan. This short-term loan will be six to twelve months in length and come with a much lower interest rate.

A brief history

Colorado politicians have wanted to institute some form of payday loan reform. Representative Mark Ferrandion has been working on payday loan reform since he arrived in the Legislature three years ago.

Critics for the payday loan industry have fought long and hard to keep the current structure. Their arguments have primarily focused around the idea that a payday loan provides credit to people who cannot get a loan from a bank.

Supporters of this new bill have a different view on the payday loan industry. Supporters argued that payday loans feed on the poor with predatory practices. These practices include outlandish percentage rates and encouraging people to take more payday loans to pay off old payday loans.

The consequences of this new bill

Consequences of this new bill are already rolling in. Over the past weekend, at least six payday loan stores closed their doors. Many more payday lenders will follow suit. Many of these sources will close their door before the bill ever becomes law.

The reason for these closures is due to the repayment schedule on new loans. Payday loan stores will need a higher cash flow, as loans will not be turning over on a bi-weekly basis. Now these payday loan sources have to wait six months before the loans bring in money.

It is not all chocolate and gumdrops

House Bill 1351 might sound like a grand idea, but like all laws, there are some gotchas. First off, the current payday loan annual percentage rates can get as high as 400 percent. Under the new law, the maximum percentage rate a loan will have is 45 percent. This might sound great until you add in loan fee. These fees could push charges to over 100 percent of the original loan amount.

Do you remember that higher cash flow need from earlier? Payday loans could start seeing skyrocketing fees to help make up for that lack of cash flow. Payday loans make their money off high interest rates. With a cap on the interest rate, what will happen to the lending fees?

A little new and a little old

This new law goes in effect on August 11, 2010. Any new loans made at that time will have to follow the new interest and time frame guidelines. Any preexisting loans are still free to follow the current laws until next year.

Colorado is taking a bold move to change the payday loan industry. How this will all play out for businesses and consumers has yet to be fully determined. With six businesses already closing up shop and more to follow, is this truly a good deal? Better yet, what will this do to the industry across the country? What state will follow this example? Time will tell.

Photo via dvs