Payday loans have become popular because they are relatively easy to qualify for and the funds are made available in just one day. These are short-term loans that require the borrower to repay them within 10 to 14 days or on the next payday.

However, there have been complaints because of their relatively high interest rates and charges. Thus, there have been calls on the federal and provincial governments to establish a cap on the payday loan rates.

Benefits of capped loan rates for consumers

It is believed that the cap on the rates prevents the possibility of abuse by payday loan companies. This assures borrowers that lenders no longer have as much leeway as before in their interest rates and charges. Lower rates mean that there is less chance for the consumers to be trapped in the debt cycle in which they have to get a new loan to repay the previous loan.

Benefits of capped loan rates for the payday loan industry

One advantage of the capped rates for payday loan companies is that the public will have more trust in them. This may result into more customers than before. Thus, despite the possible reduction in profits because of the maximum rates, the overall effect may be positive because of increased confidence on the industry as a whole. The loan companies that have been offering interest rates that are within the boundaries of the maximum rate stand to benefit the most. This is because there is no reduction in their income and the increase in number of customers is sure to represent an increase in income and profits. Meanwhile, an additional benefit for those who have to reduce their rates is that they can now compete more effectively.

Possible negative effects of capped payday loan rates

However, there is a possibility that the imposition of a maximum rate for payday loans will have negative effects. The reason for high interest rates for payday loans is that the service is extended even to consumers with low credit scores. This means that there is a bigger possibility that borrowers will default. The higher rates are supposed to cover for the losses that payday loan companies may incur. But with the cap, it is possible that they may sustain losses and thus, some companies may shut down.

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