The payday market’s critics like to accuse lenders of hiding exorbitant interest rates or fees in the paperwork that often snares the most vulnerable clients in a cycle of debt. Excellent payday loan providers clearly disclose their loan terms and conditions, such as the dollar amount of any fees and the APR. Moreover, payday lenders are controlled and monitored by state agencies as well as the new federal Consumer Financial Protection Bureau (CFPB). However, there’s no denying that payday lenders have a terrible reputation. So what if we just got rid of them completely?
If Payday Lenders Disappeared Completely
Even those who loathe the industry confess it satisfies a consumer demand. Roughly 12 million Americans take out a payday advance loan each year, spending more than $7 billion, according to the Pew Charitable Trusts. What then will people who are underbanked do? Well, let’s look at their options:
- BANKS: Critics and the CFPB have been quite public in saying the very best option would be for traditional banks, with all their regulations, to take over payday lending. Banks are easily accessible, have plenty of money, and can make loans at much lower interest rates and still be successful. However, payday advance loans are seen as very risky and costly. The expenses for underwriting and processing such small loans would eat into banks’ profits despite the high rate of interest they carry. So banks aren’t interested.
- CREDIT UNIONS: There are currently some experimental options going on to attempt to replace payday loans. One program offered through credit unions is called the Payday Alternative Loan (PAL), where a client can obtain a loan under $1,000 at 28% interest and a flat charge of $20. But interest in the program has been restricted. The federal regulator for the PAL program approximates only 20% of cooperative credit unions supplied such loans and the total loans made only added up to $123.3 million last year, which is nothing compared to the roughly $7 billion the mainstream payday lending market performed in the same year. What will everyone else do for short term loans?
- PAWN SHOPS: A 2015 Cornell University study discovered that states that prohibited payday advance loans saw more activity at pawn stores and more bank accounts being closed involuntarily, probably due to individuals over-drafting their accounts. However, pawn shops still charge high interest rates, so they don’t offer an improvement over payday loans. They just change the legalities.
How Payday Loans Help
Payday loans aren’t people aren’t looking for a hand-out. They need to have a job, a checking account, and proper identification. Most of them work hard to handle their finances so that all their obligations are met. But when something unforeseen appears, such as a flat tire, an unexpected illness, or a desperate home repair, they need help.
Some rely on loved ones or pals for help in a crunch. But when that isn’t enough, they face the terrible choice of deciding what will hurt the least: losing their home, their car, their job, or their electricity. Payday loan providers offer a better way out.
Critics of payday lending mention the high rate of interest they charge. A $15 fee on a $100 advance for two weeks amounts to a 391% yearly interest rate. That’s huge when considered as an annual rate, but keep in mind that these loans only last a few weeks. It’s likewise significant that the interest on a typical payday advance is much lower than the fees for a bounced check or a late mortgage or credit card payment.
The truth is that millions of Americans have an extremely beneficial experience with the short-term lending item, and that’s why the industry has survived so long.