Recent data published by the Federal Reserve indicates that the health of the US economy and the individual financial well-being of Americans has been consistently improving in recent years. Americans are overwhelmingly reporting positive sentiment about the health of their local economies and unemployment is at the lowest it’s been in nearly 20 years. Additionally, 95% of the US population now has access to the nation’s banking system, and the cost of alternative financial products, like payday loans, has decreased with a stable regulatory foundation being adopted by most states.
A recent national survey commissioned by the Community Financial Services Association (CFSA) revealed that over 90% of borrowers said payday loans had fulfilled their expectations and that they were pleased or satisfied with the service they received. The CFSA also reports that consumer complaints regarding payday lenders consistently decline each year and that data collected by the Consumer Financial Protection Bureau (CFPB) and the Better Business Bureau (BBB) indicates that most consumer complaints pertain to unregulated lenders.
Balanced Regulations Meeting Consumer Needs
Nearly half of Americans say they would be unable to pay an unexpected expense of $400 or more, but the American Bankers Association (ABA) reports that less than 1% of all loans made by banks are for $500 or less. This data shows that in the absence of payday lenders, many consumers would have little to no access to short term credit, apart from bank overdrafts—at an interest rate that’s more than 50 times greater than that of a typical payday loan.
Industry data indicates an improving payday loan market amid the establishment of permissive and balanced state regulations throughout most of the US. So far, 35 states have opted to permit and regulate payday loan products. In states that have started licensing payday lenders, costs for borrowers decline and consumer education increases, while short-term loan markets remain viable. Conversely, the data indicates that states that have chosen to ban, or effectively ban payday loans with low interest caps, continue to show strong demand that is ultimately driven to unlicensed lenders. In these states, borrowers end up paying on average 40% more for short-term loans than in states that have chosen balanced regulation.
Unlicensed and unregulated lenders, predominantly operating offshore or under the protections of tribal sovereignty, represent 76% of the short-term credit markets in states that have prohibited legitimate payday loan operations. Beyond the increased cost of borrowing for consumers in these states, unregulated lenders present additional risks to borrower welfare, through unethical business practices that have been effectively eliminated in states that permit licensed payday lenders. Chief among these risks are; personal information being sold for illegal purposes, deceptive or unauthorized bank account access, and threats of jail time or harm to the borrower’s reputation for failure to repay.
Another important concern raised by those arguing in favor of balanced payday loan regulation is the disparity that exists between interest rate caps for payday loans and the effective APR of bank overdrafts. Research published by the FDIC on the usage of overdrafts in America shows that more than 39 million people use overdrafts every year and that a third of them consider it a way to borrow money—in exactly the same way as a payday loan. The key difference being that overdrafts are not subject to the same fee limitations as payday loans. This results in a typical overdraft incurring a fee that amounts to an effective interest rate of more than 17,000%.
CFPB Rule Challenged
The federal small dollar loan rule put forth by former director of the Consumer Financial Protection Bureau (CFPB), Richard Cordray, has been met with public disdain, and is being challenged in court by the Consumer Financial Services Association (CFSA) and the Consumer Service Alliance of Texas.
The complaint argues that the CFPB’s insulation from any direct Presidential or Congressional oversight is unconstitutional and that the proposed rule is based solely on the unchecked powers of the former director. It’s further stated that the bureau’s policymaking has reflected a highly partisan agenda based on flawed assumptions about the consumer impact of small dollar loans—which directly contradicts the findings of impartial research and actual industry data.
The bureau has also been criticized for broadly ignoring input from state lawmakers, trade associations, other federal agencies, and over a million public comments from payday loan customers, who have argued for balanced and permissive rules that would protect consumers from harmful lending practices while ensuring that short-term credit remained available under state regulations.
America Approves of New Payday Loans
Findings published by the Pew Charitable Trusts show that Americans overwhelming feel that the installment payment plans increasingly being offered by payday lenders are affordable. Two-thirds of Americans surveyed feel that it’s reasonable to repay a $500 loan in less than 6 months. More than 80% said that a $35 fee is fair for a $300 loan that’s repaid within 3 months. Additionally, data indicates improving economic conditions for the average payday loan users with less than 1 in 4 reporting difficulties paying bills every month.
Payday Loan Fact Sheet
|96% of borrowers feel that payday loans useful.|
|13 million Americans have little or no access to the banking system.|
|Less than 25% of payday loan users have trouble paying bills every month.|
|Nearly 1 in 3 of those who have used overdrafts consider it a way to borrow money.|
|20% of Americans with bank accounts also use one or more alternative financial services, such as check cashing or payday loans.|
|1 in 5 Americans aren’t able to pay their monthly bills in full.|
|A quarter of the adult population in the US have foregone necessary medical care for financial reasons.|
|More than 50% of payday loans are repaid within the first term—usually 14 to 21 days.|
|Payday loans account for less than 2% of consumer complaints filed with the CFPB—less than mortgages, credit cards, and student loans.|
|Payday loans are available and thoroughly regulated in 35 states.|
|40% of Americans would either struggle or be unable to cover an unexpected expense of $400 or more.|
|The average payday loan is for less than $400 and has a term of 14 to 21 days.|
|72% of payday loans involve no missed payments or late fees.|
|In most cases payday loans are less costly than bank overdraft fees.|
|The average overdraft fee is $35—regardless of the amount overdrawn.|
|Most debit card overdrafts are for amounts of less than $25.|
|More than 50% of overdrawn balances are repaid within 3 days. More than 75% are repaid within 1 week.|
|A $24 overdraft repaid within 3 days with a $35 fee amounts to an interest rate (APR) of more than 17,000%.|
|The average fee for a 14-day payday loan is $15 per $100 of the loan.|
|More than 39 million Americans have overdrawn their bank account in the past 12 months.|
|75% of those who have used overdrafts in the past 12 months have faced financial difficulties.|
|Payday loans cost more in states with heavy restrictions on short-term lending.|
|In states with restrictive payday lending laws, unlicensed lenders account for 76% of small dollar loans.|
|In states with significant payday loan restrictions or bans, more than 14 million payday loans are made every year by unlicensed lenders—predominantly operating outside of US regulatory oversight.|
|12 million US households use payday loans every year.|
|On average, borrowers pay over 40% more for small dollar loans in states with significant payday loan restrictions or bans.|
|1 in 6 borrowers pay off payday loan debt with a tax refund.|
|Nearly 2 out of 3 of Americans feel that it’s reasonable to repay a $500 loan in less than 6 months.|
|More than 8 out of 10 Americans say a $35 fee is fair for a $300 loan, repaid within 3 months.|
|A typical 2-week payday loan of $300 costs the borrower $30.|
|Most payday loans are paid off on time with no additional fees.|