Signs like this one in Phoenix may become commonplace in Pennsylvania if the Senate approves a bill to make it easier for such establishments to operate in the Keystone State. — Ross D. Franklin/AP

No short-term lenders, also called payday lenders, are currently licensed to operate in Pennsylvania. But a bill pending in the state Senate would make it easier for them to do so.

See also: The dangers of payday loans.

The bill would allow payday lenders to impose a 12.5 percent finance charge on each short-term loan ­— equivalent to an annual percentage rate (APR) of nearly 326 percent. Currently the state's rate cap is typically about 27 percent for loans of up to $25,000 and 6 percent for loans up to $50,000.

The bill would cap borrowers' payday loan debt at $1,000 or one-quarter of their gross monthly income, whichever is less.

Lenders would be prohibited from lending more money to a borrower the day a loan is repaid, typically the next payday.

The bill passed the state House of Representatives 102-90 earlier this year and could be voted on in the Senate this month.

AARP Pennsylvania has joined a coalition, Stop Predatory Payday Loans in Pennsylvania, fighting the measure and has urged its members to contact their senators and ask them to vote against HB 2191.

Short-term loans are disastrous for many older people, said Ray Landis, AARP Pennsylvania advocacy manager.

Caught in debt trap

People who are on fixed incomes frequently "take out a payday loan, and they get cycled into this debt trap where they take out loans to pay off the first loan," Landis said.

The coalition sent a letter to all members of the Senate arguing that "HB 2191 opens the door to unscrupulous practices that Pennsylvania has successfully fought to keep out of its borders."

A report from the Pew Charitable Trusts (PDF) showed that 69 percent of payday loan borrowers in 2010 used the loans for regular expenses such as rent and groceries. About one-fourth of all payday loans are taken by people 50 and older.

Rep. Chris Ross, the Chester County Republican who sponsored the bill, said payday loans that are well regulated by the state would be safer than loans from out-of-state businesses. A short-term loan is better than missing a rent payment or charging bills to a credit card, he said.

Next: Do payday loans target the poor? »