Critics — including President Obama — say short-term, high-interest loans are predatory, trapping borrowers in a cycle of debt. But some economists see them as a useful financial instrument for people who need them. As the Consumer Financial Protection Bureau promotes new regulation, we ask: who’s right?
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I have never felt so informed, relaxed, nor confident within any attorney before, ever! And all that changed once we met with Erin. Since I’ve had such bad luck with previous attorneys, I was under the impression that our appointment would be very non-personable, rushed, and just looked at as… Read More
U.S. Senator Elizabeth Warren (left) talks with Consumer Financial Protection Bureau Director Richard Cordray after he testified about Wall Street reform at a 2014 Senate Banking Committee hearing. (Jonathan Ernst / Reuters)
Lenders use your credit score to determine if you’re a good or bad risk for a loan. Credit scores range from 300 to 850. The higher the number, the better your score, and the easier it is to get approved for loans. Many lenders consider consumers with scores of 620 or lower to be a bad credit risk.
A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a small, short-term unsecured loan, “regardless of whether repayment of loans is linked to a borrower’s payday.” The loans are also sometimes referred to as “cash advances,” though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries, and in federal systems, between different states or provinces.
You’ve stopped the cycle of borrowing and retaken control. With our expert debt advice and budgeting help via Debt Remedy or on the phone you can manage your outgoings within your income, without the need to take more credit.
So, given this fact, how should one think about the industry? Is it treacherous enough that it should be eliminated? Or, is it a useful, if relatively expensive, financial product that the majority of customers benefit from?
Payday loans have been in the news a lot recently, but not all short-term loans carry the same risks. LendUp Loans are an alternative to traditional payday loans from a licensed lender. A typical payday loan is exactly that: You borrow money against your next paycheck. However, borrowing against your paycheck often imposes several restrictions on this type of lending:
DUBNER:OK, so this is interesting that a watchdog group that will not reveal its funding is going after an industry for trying to influence academics that it’s funding. So should we assume that CFA, the watchdog, has some kind of horse in the payday race? Or do we just not know?
ZINMAN: And so we have a setup for a nice natural experiment there. You have two neighboring states, similar in a lot of ways. One passed a law, another considered passing a law, but didn’t quite pass it.
In the more recent innovation of online payday loans, consumers complete the loan application online (or in some instances via fax, especially where documentation is required). The funds are then transferred by direct deposit to the borrower’s account, and the loan repayment and/or the finance charge is electronically withdrawn on the borrower’s next payday.
That makes plenty of sense in theory. Payday lending in its most unfettered form seems to be ideal for neither consumers nor lenders. As Luigi Zingales, a professor at the University of Chicago, told a group of finance professionals in a speech last year, “The efficient outcome cannot be achieved without mandatory regulation.” One controversy is whether the bureau, in its zeal to protect consumers, is going too far. Under the plan it is now considering, lenders would have to make sure that borrowers can repay their loans and cover other living expenses without extensive defaults or reborrowing. These actions would indeed seem to curtail the possibility of people falling into debt traps with payday lenders. But the industry argues that the rules would put it out of business. And while a self-serving howl of pain is precisely what you’d expect from any industry under government fire, this appears, based on the business model, to be true—not only would the regulations eliminate the very loans from which the industry makes its money, but they would also introduce significant new underwriting expenses on every loan.
AAA Payday Cash requires no collateral to secure a loan. The requirements are easily met by most people. As with any loan, there is a fee associated with borrowing the money. AAA Payday Cash charges $25 per every $100 borrowed. The APR ranges from 304.17% to 1303.57%. This may seem like a very high rate, but in the end, it is cheaper to secure a short-term loan at a higher rate than a longer term loan at a lower rate. This company guarantees that the funds will be available within two business days of approval. This is a great way to obtain cash when in a financial situation requiring the need for fast funds.
A payday loan is a non-priority debt. That means it should only be paid from money you’ve got spare once you’ve paid priorities like rent, mortgage, household bills, food and living costs. If paying back the payday loan means you’ll be short of money to pay priorities you should stop the money being taken.
Although some have noted that these loans appear to carry substantial risk to the lender, it has been shown that these loans carry no more long term risk for the lender than other forms of credit. These studies seem to be confirmed by the United States Securities and Exchange Commission filings of at least one lender, who notes a charge-off rate of 3.2%.
High cost payday lending is authorized by state laws or regulations in thirty-two states. Fifteen states and the District of Columbia protect their borrowers from high-cost payday lending with reasonable small loan rate caps or other prohibitions. Three states set lower rate caps or longer terms for somewhat less expensive loans. Online payday lenders are generally subject to the state licensing laws and rate caps of the state where the borrower receives the loan. For more information, click on Legal Status of Payday Loans by State.
The Trump administration’s deregulatory mania is proceeding so quickly it’s sometimes tough to keep track of. Mulvaney is just another foot soldier for Trump’s ideological agenda, part of an ongoing campaign to dismantle regulations and defund agencies as a way of attacking financial safeguards, civil rights, and labor protections across government.
The problem we’ve been looking at today is pretty straightforward: there are a lot of low-income people in the U.S. who’ve come to rely on a financial instrument, the payday loan, that is, according to its detractors, exploitative, and according to its supporters, useful. President Obama is pushing for regulatory reform; payday advocates say the reform may kill off the industry, leaving borrowers in the lurch.
Payday loans charge borrowers high levels of interest. These loans may be considered predatory loans as they have a reputation for extremely high interest and hidden provisions that charge borrowers added fees.
Many countries offer basic banking services through their postal systems. The United States Post Office Department offered such as service in the past. Called the United States Postal Savings System it was discontinued in 1967. In January 2014 the Office of the Inspector General of the United States Postal Service issued a white paper suggesting that the USPS could offer banking services, to include small dollar loans for under 30% APR. Support and criticism quickly followed; opponents of postal banking argued that as payday lenders would be forced out of business due to competition, the plan is nothing more than a scheme to support postal employees.
FULMER: We have to wait for the final proposal rules to come out. But where they appear to be going is down a path that would simply eliminate a product instead of reforming the industry or better regulating the industry.
Behind this divergence lies a straightforward story: The twin forces of globalization and technological change are enriching a handful of big urban areas, while resources are drained from the heartland, leaving it often devoid of opportunity and prosperity. But this neat division, rural versus urban, erases another part of the story of America’s changing economy: the pressure that those twin forces are exerting within cities, pulling some people up to the very top while pushing others to an unforgiving bottom. In some prosperous cities, such as Chicago, where the number of wealthy census tracts has grown fourfold since 1970, people at the bottom are struggling as much as they always have, if not more—illustrating that it’s not just the white rural poor who are being left behind in today’s economy. The disconnect is why Andrew Diamond, the author of Chicago on the Make, has called Chicago “a combination of Manhattan smashed against Detroit.”
Other options are available to most payday loan customers. These include pawnbrokers, credit union loans with lower interest and more stringent terms which take longer to gain approval, employee access to earned but unpaid wages, credit payment plans, paycheck cash advances from employers (“advance on salary”), auto pawn loans, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans, installment loans and direct loans from family or friends. The Pew Charitable Trusts found in 2013 their study on the ways in which users pay off payday loans that borrowers often took a payday loan to avoid one of these alternatives, only to turn to one of them to pay off the payday loan.
A report from the Federal Reserve Bank of New York concluded that, “We … test whether payday lending fits our definition of predatory. We find that in states with higher payday loan limits, less educated households and households with uncertain income are less likely to be denied credit, but are not more likely to miss a debt payment. Absent higher delinquency, the extra credit from payday lenders does not fit our definition of predatory.” The caveat to this is that with a term of under 30 days there are no payments, and the lender is more than willing to roll the loan over at the end of the period upon payment of another fee. The report goes on to note that payday loans are extremely expensive, and borrowers who take a payday loan are at a disadvantage in comparison to the lender, a reversal of the normal consumer lending information asymmetry, where the lender must underwrite the loan to assess creditworthiness.
Though this service is safe and secure, there is still a concern when giving out checking and savings account information. Customers should know that AAA Payday Cash is a regulated service and is controlled by NACHA rules and regulations. This ensures that the company can never remove funds from your accounts without your approval. The amount to be removed must also be approved and authorized by the account holder.
WERTH: So, what Fusaro did was he set up a randomized control trial where he gave one group of borrowers a traditional high-interest-rate payday loan and then he gave another group of borrowers no interest rate on their loans and then he compared the two and he found out that both groups were just as likely to roll over their loans again. And we should say, again, the research was funded by CCRF.
All a consumer needs to get a payday loan is an open bank account in relatively good standing, a steady source of income, and identification. Lenders do not conduct a full credit check or ask questions to determine if a borrower can afford to repay the loan. Since loans are made based on the lender’s ability to collect, not the borrower’s ability to repay while meeting other financial obligations, payday loans create a debt trap.
So, if you were to apply in the morning and get approved, it is possible you would have the money in your bank account later that day. However, always assume that once you are approved you will receive the money in your account the next business day. Lenders do not transfer funds on weekends and holidays (or when banks are usually closed). One hour payday loans can happen but it is extremely rare.
He seemed to have a better grasp on these latter schools, analogizing them to the apprenticeship programs he was promoting in his effort to create 400,000 high-paying infrastructure jobs. The implication, as he brushed aside one form of higher education and lauded another, was that he’d like to resuscitate short-term training opportunities and phase out community colleges in the name of workforce development.
The CFPB has issued several enforcement actions against payday lenders for reasons such as violating the prohibition on lending to military members and aggressive collection tactics. The CFPB also operates a website to answer questions about payday lending. In addition, some states have aggressively pursued lenders they felt violate their state laws.
And yet the fringe has gotten awfully large. The typical payday-lending customer, according to the Pew Charitable Trusts, is a white woman age 25 to 44. Payday lenders serve more than 19 million American households—nearly one in six—according to the Community Financial Services Association of America, the industry’s trade group. And even that’s only a fraction of those who could become customers any day now. The group’s CEO, Dennis Shaul, told Congress in February that as many as 76 percent of Americans live paycheck to paycheck, without the resources to cover unexpected expenses. Or, as an online lender called Elevate Credit, which offers small loans that often have triple-digit annualized interest rates, put it in a recent financial filing, “Decades-long macroeconomic trends and the recent financial crisis have resulted in a growing ‘New Middle Class’ with little to no savings, urgent credit needs and limited options.”
Now, we should say, that when you’re an academic studying a particular industry, often the only way to get the data is from the industry itself. It’s a common practice. But, as Zinman noted in his paper, as the researcher you draw the line at letting the industry or industry advocates influence the findings. But as our producer Christopher Werth learned, that doesn’t always seem to have been the case with payday-lending research and the Consumer Credit Research Foundation, or CCRF.
Payday lending works like this: In exchange for a small loan—the average amount borrowed is about $350—a customer agrees to pay a single flat fee, typically in the vicinity of $15 per $100 borrowed. For a two-week loan, that can equate to an annualized rate of almost 400 percent. The entire amount—the fee plus the sum that was borrowed—is generally due all at once, at the end of the term. (Borrowers give the lender access to their bank account when they take out the loan.) But because many borrowers can’t pay it all back at once, they roll the loan into a new one, and end up in what the industry’s many critics call a debt trap, with gargantuan fees piling up. As Mehrsa Baradaran, an associate professor at the University of Georgia’s law school, puts it in her new book, How the Other Half Banks, “One of the great ironies in modern America is that the less money you have, the more you pay to use it.”