Back in March, the Consumer Financial Protection Bureau took its first long-awaited step in reining in the payday loan industry by releasing an outline for potential regulations over the small-dollar lines of credit known to thrust consumers into a devastating cycle of debt. While consumer groups were quick to applaud the steps, they also expressed concern that more could be done to protect people from the devastating consequences of such loans. This week, Pew Charitable Trusts released a video detailing the predicament nearly 12 million Americans face every year when taking out payday loans and how regulators might be able to find an answer.
Pew Charitable Trusts, which has extensively studied the payday lending industry and its often negative effects on consumers, asserts in the video that the CFPB and state policy makers have an opportunity to make small loans safer and more affordable for cash-strapped individuals.
According to Pew, 12 million Americans spend about $17 billion on payday loans each year in the 36 states where the small-dollar lending is legal.
One of those borrowers is Jennifer – the star of Pew’s latest video – who takes out a $375 payday loan to help pay bills. Unfortunately, like many others in her position, the loan offers little help and instead ruins her budget.
That’s because, Pew says, payday loans have unaffordable payment schedules and exceedingly high interest rates.
“It’s not hard to see why people like Jennifer are drawn to the loans,” the video
states. “They look like two-week loans with a fixed fee of $55 but they’re not.”
Instead, the loans have to be paid back in full within 14-days, a task that is difficult for consumers living paycheck-to-paycheck.
“The reality is… that a typical borrower carries these loans for half the year,” according to the video.
Pew then goes into the need and desire for payday improvements among consumers, noting that eight-out-of-ten Americans favor reform.
“The CFPB can fix these problems with a strong ability to pay rule that allows borrowers to make smaller payments over longer periods of time,” Pew notes while referencing research that found consumers can often only afford to spend 5% of their paycheck repaying such loans.
This reform would then allow Jennifer to maintain her budget while paying just $60 from each paycheck toward her $375 loan.
As for states, Pew says they can work to rein in excessive interest rates; a step that has been taken in several states such as Colorado.
In that state the loans are still available and widely used, they just work better. In fact, Pew says consumers in Colorado saved nearly $40 million after protections went into effect.
“The point is there is a solution,” the video states. “A better small loan market is possible with lower prices and more time to repay. Policy makers of all levels need to act now to help borrowers like Jennifer get back on solid ground.”
Category: Payday loans