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
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.