Pew talks about payday loans | PYMNTS.com
These days, the payday loan is not a topic that lends itself to much rational talk. He is much more successful in attracting heated disagreements among supporters.
Opponents of the practice note that, in its most vicious form, payday loans are a costly predatory plague on the class of borrowers they attract, dragging them into a confusing and prolonged cycle of debt. Proponents counter that what, from the outside, looks like terrible abuse is actually – for many consumers – the thin red line that separates them from some really objectively terrible things, like repossession, eviction or the tender mercies of a collection agency.
And while the sticking points are endless – and were documented, in all their colorful wonder, across the pages of PYMNTS in 2016 – there seems to be one thing everyone involved in the debate agrees on, and that’s The Pew Charitable Trusts’ Numbers.
While representatives from each side will question almost any set number – and generally the moral decency, patriotism, and intelligence of the people who put them together – the numbers from The Pew Charitable’s Small Dollar Lending Project Trusts are generally seen as the gold standard in the debate.
So, PYMNTS reached out to Pew and his Low Dollar Lending Project Director Nick Bourke to get their take on the payday lending problem, as the ecosystem eagerly awaits the next round of draft rules in the world. CFPB on the subject.
And what we learned from Pew’s perspective was a bit surprising.
“Most of the people in the payday loan debate keep asking the wrong question,” Bourke told PYMNTS in an interview. “They keep asking: are payday loans good or bad? Should we have them or not? “
The problem with framing the debate this way, Bourke says, is that it misses the point most of the time. Payday loans, because of who they serve and what they do, go nowhere without dire consequences.
“The best question is, how do you make small loans available to people in a safer and cheaper way? Research has answered this question. You give them more time to pay, with better guidelines on how much a monthly payment is and how long a loan can last. “
What else have we learned from Bourke?
The average payday loan customer is “fairly general”
Payday loans – despite the press they get as a fringe financial service – aren’t really for fringe clients, according to Pew’s research, or at least they aren’t fringe in a way that most people do. would imagine.
Most payday loan borrowers are whites, women and single parents, Bourke noted.
“The payday borrower is an incredibly ordinary consumer. They earn at least $ 30,000 a year, which is $ 15 an hour. They have a checking account because you need a checking account to get a payday loan. And in seven out of ten cases, they use it to pay a bill.
Although it is generally described as “outside the credit system”, it is also a bit wrong. Most payday loan borrowers have maximum credit cards; paying off credit card balances is actually a fairly common use case for short-term loans.
“These products are aimed at low-income consumers but not at the bottom of the barrel. More importantly, this income then determines who gets a payday loan. He’s someone who lives on a paycheck and struggles to pay his bills.
The typical problem with payday loans
Payday loans are expensive, Bourke notes, but cost isn’t really the main structural issue. It is the extremely short duration that tends to cause an extremely costly set of problems for the average user.
“The typical classic payday loan is due in full two weeks. The average size is around $ 375, with an additional charge of $ 55. So about $ 430 is owed.
When most people think of the cost of the loan, they name $ 55 as the price. But, Bourke says, that’s not how it happens 80 percent of the time.
“On average, $ 430 represents 36% of a typical borrower’s salary before taxes. So when this loan matures, the already struggling borrower loses a large portion of his income. The payday lender has huge leverage on the borrower because they can access the borrower’s checking account and get paid first.
And this is where the problems arise, according to Pew data.
“The borrower struggles to pay other bills, like rent or mortgage, and the borrower ends up taking out another payday loan to make ends meet. This is why the data is very consistent that the typical borrower renews or re-borrows payday loans almost immediately after paying off a previous payday loan, and is in debt, on average, for half the year. before eventually getting out of it. During this experiment, they paid $ 520 on average, which is way more than the price of $ 55 that is listed.
The set of solutions – if one is possible at all
The problem with the above-mentioned situation, according to Bourke, is mainly centered on knowing consumers. The borrower thinks the loan costs $ 55, when in fact it will cost him more than $ 500. And that the CFPB can correct – narrowly.
“Payday and auto title loans are going to stay in the market, and the CFPB does not have the ability to regulate prices. So we’re still going to see, even with the CFPB rules, millions of people using payday loans and auto titles at an APR of 400% or more. The main impact of the CFPB rule is that the typical borrower will have more time to repay the loan, but they will not necessarily save money. “
Those seeking to debate the merits of abolition are unrealistic, Pew says, and are not asking the right question about the upcoming draft regulations. The first good question is about reasonable limits.
“To what extent does this put an end to harmful practices in the market? “
The second – and most complicated – question is whether the CFPB rule will provide guidance to create reasonable competition in the short-term lending market as it is currently constituted.
“Does the CFPB rule provide clear product safety standards that banks and credit unions can use to offer competing products? Bourke asked.
And this second question, said Bourke, is the most difficult. Banks and credit unions have been warned against high-risk unsecured debt of the type exposed with short-term loans by the FDIC and the Office of the Comptroller, and trying to get them into the market. is not simple.
“The CFPB and all banking regulators agree that a short-term lump sum loan is a dangerous proposition. This is why the OCC and FDIC forced the banks to stop offering deposit advance products because they were essentially just payday loans due in full in two weeks. ”
But, Bourke notes, the CFPB rule could do more here if properly formed.
“What no one knows yet is what a good small installment loan should look like under federal regulations, and that’s why the CFPB rules are so important. The CFPB has the ability to define what Looks like a secure, affordable small loan, and if they seize that opportunity and define it, you’ll see banks start offering them to consumers on a large scale for six to eight times less than what’s currently on the market.
This last element – for us – seems optimistic. The CFPB should come up with a definition that would make it more than just plausible to offer short-term, low-value loans to high-risk consumers, but also profitable. It seems like a very steep mountain to climb.
But overall, Nick Bourke made a strong point. Research shows that consumers want these products to exist and would prefer regulations that make the process at least more transparent (although less expensive is also strongly preferred).
“It comes down to what each person’s goals are. “