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The Legislature should emphatically reject a bill that aims to create a type of consumer loan not subject to the state's 36 percent interest-rate cap. Like the measure that brought payday lending to Arizona in 2000, this bill is unnecessary and potentially harmful to many state residents.

House Bill 2672, sponsored by state Rep. Andy Biggs, R-Gilbert, would create a carve-out to the state's lending laws. It would allow lenders to make loans of $200 to $3,000 for periods ranging from five to 24 months.

Lenders would be able to charge a loan-acquisition fee. The minimum would be $15 for each loan transaction or a maximum of $75 or 10 percent of the amount financed, whichever is lower. However, since the loans start at $200, the effective minimum fee is $20.

The interest rate charged on the loans would vary with the amount borrowed. Lenders would be allowed to charge a 4 percent monthly handling charge on the first $750 borrowed; 3 percent a month on any amount from $751 to $1,500; 2 percent monthly on $1,501 to $2,250; and 1 percent monthly on $2,251 to $3,000.

While a maximum 4 percent monthly interest rate may seem reasonable, it's an annual rate of 48 percent, which is above the state's 36 percent limit on consumer loans.

Crunch the numbers and add in the acquisition fees, and it becomes clear these loans are bad deal, especially at smaller amounts.

For example, a person who borrows the $200 minimum for the shortest five-month term would pay a $20 acquisition fee and $40 in monthly maintenance fees. Using an online annual-percentage-rate calculator, we found that the APR for this loan is 113 percent. For a $3,000 loan over 24 months, the APR is 52 percent.

Plugging in various loan amounts and repayment periods, it was common to see APRs in the low triple digits or high double digits.

While these new loans wouldn't be as bad for consumers as payday loans, which have fees that equal annual interest rates of about 400 percent, they are no bargain.

"These loans are what I call 'usury light.' Payday loans are 'usury heavy,'" said state Rep. Marian McClure, R-Tucson, who introduced the Stop Payday Loans initiative that she and others are working to put on the November ballot. "These loans will do exactly what payday loans did, create havoc among the people."

The new loans being considered are similar to payday loans in that they would allow loan "churning," the ability to renew the loan up to three times. The lender could charge an acquisition fee each time a loan is renewed.

A loan could become a line of credit, of sorts, with a consumer taking out a loan, paying down some of the principal and then taking out more money at a later time.

In a letter to state and legislative leaders this week, the Consumer Federation of America, a Washington, D.C.-based advocacy group, said the way the bill is written it "will encourage a lender to repeatedly renew a loan to extend the loan and continue earning fees and interest month after month. ... This is the same pattern of repeat lending as payday lending."

The AARP also opposes HB 2672.

Lupe Solis, the AARP Arizona advocacy director, said last week, "Our Legislature should be the first line of defense, not the entry point, for these types of consumer-bilking arrangements."

Legislators should realize that these kind of loans aren't necessary.

Kelly Griffith, an activist against predatory lending, said there are more than 90 lenders in the state authorized by the Arizona Department of Financial Institutions to provide small loans to consumers.

"They all operate within the 36 percent interest-rate cap," Griffith said. "Why do we have to have an exemption? It undercuts the small-loan lenders that are already doing business in Arizona and it will tell legitimate lenders to charge more.

"Allowing another carveout is just folly. It will play out just like payday loans and years from now people will ask why we allowed this to happen."

HB 2672 has already passed in the House and is scheduled to be heard in a Senate committee on Monday.

Payday loans have been bad news for many Arizonans. If allowed, these new loans wouldn't be as bad, but they could still trap many consumers in debt. We urge legislators to reject this bill and not expose Arizona consumers to more predatory lenders.