Payday Loans — And How to Fix Them

Payday loans suffer from three main problems, according to extensive research—unaffordable payments, failure to work as advertised, and excessively high prices.

But the Consumer Financial Protection Bureau and state policymakers have an opportunity to fix these problems and make small loans safer and more affordable. Learn how new rules could give payday loan borrowers an affordable and predictable path out of debt.

For more on problems with payday loans—and how policymakers can help solve them, visit: http://www.pewtrusts.org/en/research-and-analysis/reports/2013/10/29/payday-lending-in-america-policy-solutions

*TRANSCRIPT*

This is Jennifer.

She took out a 5 payday loan to cover some bills, but it ended up ruining her budget. And she’s not the only one. 12 million Americans use payday loans every year.

It’s not hard to see why people, like Jennifer, are drawn to payday loans. They look like two-week loans — for a fixed fee of .

But they’re not. Unlike other types of loans, payday loans have to be paid back all at once, which is hard to do if you’re struggling to make ends meet.

Instead Jennifer pays a fee to buy more time. The reality is that instead of two weeks, typical borrowers carry loans for half the year, and spend more in fees than the amount they borrowed.

Eight in ten borrowers want payday loan reform, and policymakers can put it in place.

The Consumer Financial Protection Bureau — the new referee for payday lenders – can fix this problem. A strong ability-to-repay rule from the CFPB should allow borrowers to make smaller payments over more time.

Today, these loans take up 1/3 of the average borrower’s paycheck — and that’s just too much. Research shows most borrowers can afford to spend no more than 5% of their paycheck on their loan payments.

In Jennifer’s case, she can still get her 5 loan. And by limiting payments to 5% of her income, she would pay only out of each paycheck—instead of having to repay 0 dollars all at once.

This will mean that loans have smaller, more manageable payments that fit into borrowers’ budgets, making for a more affordable, and predictable path out of debt.

It’s also important for states to rein in excessive interest rates.
These changes, plus a few commonsense safeguards, have already been tried with success.

In Colorado, lawmakers cut prices by 2/3 and gave borrowers more time to pay their loans in smaller installments.

Now the loans work as advertised. Borrowers missed fewer payments and saved more than million a year.

While some payday stores in Colorado closed, those that remain serve more customers. Loans are still widely available and accessible, but work better.

The point is – there’s a solution. A better small loan market is possible, with lower prices and more time to repay in affordable installments. Policymakers at all levels need to act now – to help borrowers like Jennifer get back on solid financial ground. To learn more, go to http://www.pewtrusts.org/small-loans.

4 thoughts on “Payday Loans — And How to Fix Them

  1. Although I can see exactly why this happens, people shouldn’t take out
    loans that they can’t pay back. These people are warned all over the place,
    if they don’t take that warning or cannot afford to repay their payday loan
    then unfortunately they will fall into this trap. I do totally agree that
    it would be a great thing if lenders allowed their customers to pay back
    smaller increments and be given more time.

    We operate a payday loans site ourselves, we are not a direct lender
    though. We put people in touch with lenders so that they can get a payday
    loan: http://paydaybee.com

  2. I see, price and terms control as a solution, as a means to helping people
    in need. Just like the minimum wage. This is quite ignorant economically
    and causes unintended consequences (even fewer options for borrowers).
    If you want to offer borrowers a better deal (more incremental
    installments, lower interest rates, longer loan terms), then find a way to
    offer a better deal. You will have great success, I’m sure. For instance,
    invest in loan companies that offer the best deal or start your own.

    But the fact that you’re not willing to put your money where you mouth is
    (and actually help people in need) should be telling. You don’t think it
    would be profitable anymore (payday loans already has small profits
    already). Deep down, you know there is no free lunch.
    So instead, it is better to posture, regulate the industry so only the
    loans you approve are viable (short of banning payday loans), and other
    loans become impossible (too bad for borrowers who may miss those options),
    and get some signalling value out of it.

  3. Jennifer should have thought about her budget in the first place when she
    was applying for a loan. Actually, considering all the terms and
    conditions, rates, APR, other figures are clearly stated in the agreement,
    all she had to do is add a loan to the expenses, which is huge, but that is
    how these credit works. Apparently, the expectations borrowers have
    regarding their financial options surpass the actual picture, but that
    doesn’t make loans the reason why borrowers can’t repay. Today all legit
    lender align with the best practices rules, and providers, like loansmob.com
    or other resources care to educate borrowers before any deal is closed. In
    fact, it would be unreasonable to lend to anyone who can’t realize the
    responsibility and evaluate personal financial scopes.

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