Alternative Charge Loans Overview

Alternative Charge Loans Overview

Colorado has a long history of enacting meaningful regulations on high-cost lending products, like payday and supervised installment loans. Alternative charge loans, however, stand out as an exception to this trend. With total fees often topping 100 percent, alternative charge loans present a barrier to economic security and circumnavigate voter preferences for reasonable caps on high-cost lending products.

Illustration showing a contract with "Alternative Charge Loans" written over "Payday Loans"

What Are Alternative Charge Loans?

Alternative charge loans are a type of high-cost, small-dollar loan offered in Colorado. As seen in the chart below, alternative charge loans are similar to another well-known lending product: payday loans. Allowable APR, or the total fees and interest rates assessed on a loan, serve as the prime point of differentiation between payday and alternative charge loans.

High-Cost, Small-Dollar Lending Options in Colorado

In 2020, the Attorney General’s office released the following information regarding utilization of alternative charge loans in the prior year.

Alternative Charge Loans in 2019

What happened to alternative charge loans after passing Proposition 111?

Proposition 111 placed a 36 percent cap on total APR for payday loans. This was a substantial change, as prior to this, the average APR for these products was 186 percent. Notably, this 2018 measure was tremendously popular, and passed with 77 percent of the vote.

Despite their similarities, alternative charge loans were not subject to Proposition 111’s rate cap. This created a loophole for lenders, many of whom, according to the Attorney General’s office, simply switched from providing payday to alternative charge loans after the proposition went into effect. This trend is evidenced in the number of small-dollar, high-cost loans originated in 2018 and 2019. As seen in the chart below, the number of alternative charge loans in 2019 (post-Proposition 111) and payday loans in 2018 (pre-Proposition 111) are not tremendously different.

High-Cost, Small-Dollar Lending in 2018 & 2019

Why high APRs matter

High-cost lending products, like alternative charge loans, are known for creating cycles of debt. Many individuals use these products when experiencing  a financial crisis. Already in an economically vulnerable position, the high fees and charges on these loans can heighten repayment challenges for consumers. Unable to pay the loan back, customers may request an extension or take out a new loan, which tacks on further costs. These additional charges make the loan even more difficult to repay, furthering the need to take on more debt.

Placing reasonable APR caps on high-cost lending products can help minimize these cycles of debt by reducing total costs and decreasing the need to renew existing loans.

How Do Other States Regulate High-cost, Small-dollar Loans?

Many states regulate the APR for small-dollar, high-cost loans. The chart below shows states which cap APR for these products at 36 percent. Notably, regulations exist in both urban and rural, conservative and liberal, states.

States With 36% APR Rate Caps for Small-Dollar Loans

Colorado voters have made clear their preference for regulations on small-dollar, high-cost loans. Alternative charge loans circumnavigate these preferences and actively foster economic instability for many Coloradans. We have the tools to address this gap in our laws. By bringing alternative charge loan regulations into line with those for other high-cost lending products, we can take steps to foster greater economic security throughout our state.