Much has been said and written about payday loans.
In fact, there has been a literal deluge of data on the subject: stacks of studies, tons of regulations, a plethora of public hearings, and an otherwise endless series of arguments over whether this form of lending is. or not a useful and well-understood type of loan for the banked middle class people who need it – or a predatory product that traps consumers in a cycle of costly debt.
There has been so much said and written that the PYMNTS team has written quite a bit ABC eBook on the subject it’s worth reading for the names of the Congressional subcommittee hearings alone. (“The CFPB’s assault on access to credit and the trampling of state and tribal sovereignty” will always be our favorite.)
Pew has added a few new data points to the stack in an attempt to get to the heart of what consumers – the average citizen and the payday borrower – think of them.
You will need some facts first.
Payday loans range between $ 100 and $ 1,000, although many states cap them at $ 500. The average amount borrowed is $ 395; the median is $ 350. They are generally the shortest of short-term loans – as they are meant to be repaid on the borrower’s next payment date – and typically have an initial term of around two weeks. However, most payday loans are rolled over, and consumers who do not (or nearly) pay off them tend to have their loans last for 112 days, or 3-4 months.
Payday loans typically assess fees per $ 100 borrowed, typically ranging from $ 15 to $ 30. Since borrowers on average renew their payday loans beyond their original 14-day term, fees and interest can quickly exceed the original loan amount. A borrower on the average loan of ~ $ 375 will pay $ 520 in interest if they extend their loan over the standard term (3-4 months). Annualized Translated Costs (of the type you see on a credit card bill): Loans have average APRs between 300% and 400%.
Payday lenders say that since loans are designed to last two weeks and most people pay them off in less than 60 days, annualization of costs only makes sense as a way to generate a lot of bad PR. . Payday loan reviewers note that, since payday loans are quite often renewed and extended for a quarter of a year or more, providing consumers with a longer-term picture of fees over time is a useful way to understand the “total cost of ownership” of these credit products.
The average borrower is neither unbanked nor financially deprived, as borrowers must have access to both a checking account and a job to even qualify for a payday loan. According to the Pew Charitable Trusts, the average borrower is a white woman aged 25 to 44 with at least one child, at least one credit card account, and a full-time job with a salary of between $ 30,000 and $ 50. $ 000 per year.
Most borrowers are also part of the 47 percent club: the 47 percent of Americans who the Federal Reserve said couldn’t raise $ 400 to pay for an emergency. The most common reason borrowers take out a personal loan is to cover the basics: repairing their cars so they can get to work.
Now let’s move on to the Pew study.
The general consumer
In July 2016, the CFPB proposed a new rule to govern payday lending and auto title lending. According to Pew, the new rules “would establish a process for determining the applicant’s ability to repay a loan, but would not limit the size of the loan, the amount of payment, the cost or other conditions.” Many sources wrote that this new underwriting requirement, improved credit control, and repayability rules will likely shut down 80% of payday (and short-term) lenders.
Keep this number in mind – it will become important later.
It is perhaps not all that surprising that Pew’s data reflects an interest on the part of the American consumer in regulating these products, with 70 percent of them saying the industry should be more regulated.
But this is where it starts to get wobbly.
When specifically asked if it would be a good result if consumers had “more time to pay off their loans, but the average annual interest rate would still stay around 400%,” 80% of consumers said that it would be mainly a bad result – because against 15 percent, who said it would be mostly a good result. This, of course, reflects part of the CFPB proposal.
The survey also indicated that 74% of Americans thought that “if some payday lenders went bankrupt, but the remaining lenders charged less for the loans” would be a rather good result, compared with 15%, who said it would be a good result. bad result.
You almost must be wondering who the 20 percent were who thought this might be a good idea.
Consumers have shown overwhelming support for low rate loans, especially low rate loans offered by banks and credit unions. Seventy percent of survey respondents said they would have a more favorable opinion of a bank if it offered a $ 400 loan over three months for a fee of $ 60.
Note that respondents could only choose between non-bank lenders charging 400% interest on an installment program, or bank / cooperative lenders charging “six times less than payday lenders”. Respondents were unable to choose a non-bank lender that charged an interest rate other than three digits.
Seems like a weird way of phrasing a question, maybe?
Pew also asked consumers which option would be best for them. Option one: Lenders run borrowers’ credit reports, assess their spending, and then grant the loan for about $ 350 in fees (on a $ 400 loan). Option two: Lenders look at the customer’s current account history and grant a $ 60 loan fee (out of a $ 400 loan).
We’ll let you guess which one got the most answers.
The borrowers’ perspective
In some ways, payday loan borrowers have similar views on the institution than the rest of the nation.
About 70% of borrowers think tighter regulation is a good idea and strongly support possible plans that involve getting a $ 400 loan for $ 60 in fees to be repaid over six months – far more than they do. Don’t like the idea of paying $ 600 in fees for a $ 500 loan over a six month payment period.
Who wouldn’t? But this is not how the majority of borrowers use these products.
Payday borrowers also tend to view the institution a little differently. When weighing their options – remember the circumstances: a consumer in the bank with an emergency – their top three concerns are how quickly they can access money, how much the money will cost, and how likely they will be. approved for funds.
Naturally, they also see solutions in which “some payday lenders went bankrupt, but the remaining lenders charged less for the loans,” much lower than the general population – with over 30 percent of them saying that it would be detrimental rather than helpful. Payday borrowers also showed mixed support for the stricter underwriting requirements the CFPB is considering for short-term loans: 46% said such a change would “not be an improvement”, compared with just 21% who said it would be.
People, it seems, like low rates on any loan – short term, long term, and everything else.
They also like to have access to short term loans which help them in a pinch from credible providers of these funds. So, we can assume that they probably wouldn’t appreciate it if 80% of these lenders were suddenly no longer available to them.
When it comes to rates, lending is a risky business for any borrower, and lenders underwrite the risk and the price for it. Short-term lenders don’t charge high rates for the sake of usury – short-term lenders lend to people with less than stellar credit and a 20% default rate. Bank loans, on the other hand, have a default rate of around 3%.
The future of the industry is still uncertain, as the final CFPB regulations have yet to be released.
“The CFPB rule is one where I don’t think it’s well thought out, and it’s a little offensive to the state system. My line on this rule is that it was written in essence by people who never needed $ 500 to cover their costs or fix their cars. So they prefer to severely limit credit opportunities for these people and seem totally oblivious to the social consequences of that, ”a regulator from a panel told IP 2017, noting that the industry as a whole is in favor of regulation, but not to top-down regulation which is done regardless of the conditions on the ground.
Yes, even the industry would like to see clearer rules set – and for every skanky lender like this, there are many who use software to comply with state rules to control rates. But, more than clear rules, they would prefer those rules to be based on facts, so they can stay in business – something even this recent Pew study seems to indicate their clients would prefer, too.