Payday Loans Are Down The Economist

IN MAY 2013, Gloria James borrowed $ 200 from Loan Till Payday, a lender near her home in Wilmington, Delaware. Rather than take out a one- or two-month loan for a fee of $ 100, as she had done several times before, she was offered a one-year loan that would earn her $ 1,620 in interest. an annual rate of 838%. . Ms James, a housekeeper earning $ 12 an hour, accepted the high-interest loan but quickly fell behind on her payments. After filing a lawsuit in federal court, a Delaware judge ruled that the loan in question was not only illegal but “unreasonable”.

Its history is remarkably common. Americans who live from check to check have few places to turn when they are in financial difficulty. Many rely on high interest payday loans to stay afloat. But the government’s efforts to crack down on the $ 40 billion industry could have an effect.

According to government statistics, about 2.5 million US households, about one in 50, use payday loans each year. The typical loan is $ 350, lasts two weeks, and costs $ 15 for every $ 100 borrowed. Although payday loans are marketed as a source of short-term cash to use in financial emergencies, they are often used to deal with chronic budget deficits. In 2015, more borrowers in California took out ten payday loans than one. Critics say the industry is fooling its vulnerable customers into paying high fees and interest rates. And yet, surveys show that its customers are mostly satisfied because payday loans are easy and convenient.

The regulation of payday loans in America has always been the responsibility of the states. Over a dozen are using interest rate caps to, in effect, ban payday lending. But lenders can circumvent these laws by registering as “credit service organizations,” moving to other states, or even working with Native American tribes to claim sovereign immunity.

At the federal level, Congress passed the Military Lending Act in 2006, capping military lending rates at 36%. More recently, the Justice Department launched “Operation Choke Point,” an effort to push banks to sever ties with companies at risk of money laundering, including payday lenders. But the real crackdown on payday loans could come if the Consumer Finance Protection Bureau (CFPB), a watchdog, implements new regulations on high-interest loans. The rules include underwriting standards and other restrictions designed to prevent borrowers from getting into debt; CFPB estimates they could reduce payday loan volumes by over 80%.

The threat of regulation may have already had an effect. The Center for Financial Services Innovation, a nonprofit group, estimates that payday loan volumes have fallen 18% since 2014; revenues fell by 30%. In the first nine months of 2016, lenders closed more than 500 stores and the total number of jobs in the industry fell 3,600, or 3.5%. To avoid the new rules, lenders are moving away from lump sum payday loans in favor of installment loans, giving borrowers more time to get back on their feet.

It would be premature to celebrate the demise of payday lenders. The Trump administration is likely to block new CFPB regulations. And even if the rules are enforced, consumers may not be better off. Academic research on payday loan regulation is mixed, with some studies showing benefits, others costs, and still others finding no effect on consumer welfare. A forthcoming article by two West Point economists concludes that the Military Lending Act provided “no significant benefit to the military.”

This article appeared in the Finance & Economics section of the print edition under the title “Principles and Interests”

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