Payday loans, small online loans and similar short-term lending products provide an important and valuable service not offered by traditional lenders. According to the American Bankers Association (ABA), only one percent of all loans made by banks are for $500 or less. Were it not for non-bank lenders, many consumers would have no access to small, short term loans.
What Makes Payday Loans So Popular
Banks do not profit from small, short term loans. Payday lenders do. Storefront payday lenders locate their facilities in areas where the demand for small loans is at its highest. Consumers in these neighborhoods do not typically have credit cards with which they could otherwise obtain a cash advance. Their only small loan option is with payday lenders.
Characteristics of Payday Loan Borrowers
Consumers who take out payday loans tend to be in their early forties with a total household income between $30,000 and $40,000. The median payday loan amount is about $430 with a median loan cost of about $110 and a median loan term of about 20 days.
Payday Loan Complaints Decline Every Year
According to the Community Financial Services Association of America (CFSA), consumer complaints about payday loans decrease every year. In the first quarter of 2015, there were 489 payday lender complaints. In the first quarter of 2016, there were 420 complaints. That’s a decrease of roughly 14 percent over a one-year period.
How Borrowers Feel About Payday Loans
Borrowers see payday loans as a short term solution for an immediate financial problem. A recent Harris Survey reported that almost 95 percent of borrowers were pleased with the terms of payday loan service. Borrowers said they had carefully considered the risks and benefits prior to borrowing the money and were grateful to have the payday loan option.
Borrowers Are Highly Satisfied with Payday Loans Overall
A recent national survey commissioned by the Community Financial Services Association (CFSA) revealed that over 90 percent of borrowers said payday loans had fulfilled their expectations and that they were pleased and satisfied with the service. Twenty-five percent of borrowers said that it was easy (or somewhat easy) to repay their loans.
Short Term Lenders Provide A Valuable Service
Most borrowers reported that payday loans were a valuable resource when they were faced with financial shortfalls. The survey indicated that almost all borrowers understood the terms and costs of their loans as well as the time it would take for repayment. Without payday loans, these borrowers might incur hundreds of dollars in overdraft fees and late payment charges on credit cards and utilities.
No Evidence to Suggest that Payday Loans Harm Consumers
According to a recent Consumer Financial Protection Bureau (CFPB) report, only fifty percent of payday loan borrowers obtained a second payday loan. In 2014, there were only nine complaints about payday loan lenders, all of which were resolved to everyone’s satisfaction.
Of all the federal consumer complaint information filed with the CFPB, less than two percent involved payday lenders. There is no evidence to show that consumers have been harmed by payday loans, and that is true whether the loans involved a lump sum repayment or were repaid in installments.
Banks Do Not Offer Small, Short Term Loans
The payday loan industry has always supported the idea of banks offering small loans to consumers. However, most banks refuse to provide this service. Their customers typically do not need small loans of only a few hundred dollars. The market for payday loans is one that banks are unwilling to serve. Only payday loan lenders stand ready to provide this much-needed service.
Payday Lenders Could Soon Be Out of Business
Payday lenders have come under recent attack by the Consumer Financial Protection Bureau’s (CFPB) proposed Small Dollar Lending Rule. The CFPB is in the process of developing rules and regulations that could put payday lenders out of business, even though borrowers believe that getting a payday loan should be up to the borrower, not the government.
Extended Repayment Plans: A New Development In The Payday Loan Industry
A recent article in the Salt Lake City Tribune proclaimed that 45,000 Utah residents were unable to repay payday loans last year and that only seven percent of borrowers were offered extended repayment plans.
Payday loans were originally two-week loans where borrowers were required to repay the full amount of the loan in one lump sum. Payday loans are now available with installment repayment plans, although single payment loans remain an option.
The state of Utah has recently adopted safety protections for payday loan consumers. The most striking development was that borrowers should be offered an extended and interest-free repayment period of several weeks. This policy was designed to upgrade the value of payday loans for all borrowers. An extended repayment period is also supported by CFSA’s mandatory member best practices.