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Payday Lending in America: How Small Dollar Loans Create Big Problems for Families and Communities


Payday companies argue that the market needs their products — that without their existence, borrowers would inevitably turn to unregulated neighborhood loan sharks to make ends meet. But of course, that’s not the reality. Payday lenders actively damage the communities they claim to serve.

The payday loan industry takes advantage of the financially underserved by creating debt traps, or destructive patterns of repeat borrowing, that affect individuals, families, and communities. Entire neighborhood economies experience the negative repercussions of payday lending.

Small Loans; Big Problems

So how do small-dollar loans, averaging only $375, have any lasting — or even devastating — financial consequences on borrowers?

Payday loans come with short terms (usually 14 days, the length of the typical pay period, hence the name “payday”) and extremely high interest rates (400% APR on average). Payday lenders target low-income individuals and those with poor — or no — credit histories. They know that this underbanked customer segment will be more likely to accept their short terms and high interest rates.

According to a study on small loans by The Pew Charitable Trusts, rates of payday loan usage are 62 percent higher for people earning less than $40,000 annually, 82 percent higher for those with only some or no college experience, and 105 percent higher for black people compared to other races/ethnicities.(1)

While small dollar loans do meet a need, the short terms and lump sum repayment structures put lower-income individuals at risk. A borrower rarely has enough money to repay the principal loan amounts, high interests and fees after receiving one paycheck. Thus, they have to extend or “rollover” their loan terms. These loans are designed to create the need for repeat usage, racking up damaging amounts of debt.

Payday loans are designed to create the need for repeat usage, racking up damaging amounts of debt.

The Federal Reserve Bank of Kansas City Economic Research Department found that “the profitability of payday lenders depends on repeat borrowing.(2) Instead of the advertised 14-day loan, the average payday loan borrower will take out multiple loans, continually rollover, and be trapped in debt for five months out of the year.

It gets worse. Every time a payday loan storefront opens in a neighborhood, it sets the stage for other payday loan storefronts to enter. It’s considered a best practice in the payday loan industry to locate stores in clusters. This way, if (or when) borrowers can’t pay their loans at one location, there is another location down the street ready to offer them another loan that they cannot comfortably afford to repay. As the debt cycle continues, it exacerbates the cycle of poverty in communities all over the country.

If (or when) borrowers can’t pay their loans at one location, there is another location down the street.

Recommendations

Currently, payday lending is regulated at the state level. However, this may change soon as state regulators receive assistance from federal and local governments. After the 2008 financial crisis and 2010 passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the federal government has refocused on drafting and proposing new policies to protect borrowers.

At a 2012 hearing, Consumer Financial Protection Bureau Director Richard Cordray said, “We recognize the need for emergency credit. At the same time, it is important that these products actually help consumers, rather than harm them.”(3)

Strategies traditionally taken at the state level to regulate payday lending include caps on interest rates and loan sizes, limits on loan terms and simultaneous borrowing, rollover prohibitions, cooling-off periods, and extended repayment options.(4) Some cities in states with little to no regulation are using zoning and land use laws to prevent storefront clustering in unbanked communities.

But changes in local policies and stricter regulations across the board are not enough to prevent the negative effects of payday lending. Safe credit options need to be made available to unbanked or underserved Americans. These products should offer manageable repayment plans, lower annual percentage rates, and credit education incentivized by further rate reduction. Those products are available today through responsible online lenders like OppLoans.

OppLoans

Online lender OppLoans serves borrowers with non-prime credit ratings. We provide them with a safe and affordable alternative to payday loans and other predatory credit products. According to CEO Jared Kaplan, “[The underbanked] shouldn’t be forced to turn to a payday product. OppLoans is here to show borrowers that they have better, safer, lower-cost options.”(5)

If you need money, for whatever reason, apply today and receive funds in your account as soon as the next business day. Interest rates on our personal loans are up to 125% cheaper than payday loans and our knowledgeable and caring loan advocates are standing by, ready to answer any question you have. The current model of payday lending is outdated and dangerous; with OppLoans, underserved consumers have access to financial products as safe as traditional bank loans.

OppLoans is the nation’s leading socially-responsible online lender and one of the fastest-growing organizations in the FinTech space today. Embracing a character-driven approach to modern finance, we emphatically believe all borrowers deserve a dignified alternative to payday lending. Currently rated 5/5 stars on Google and LendingTree, OppLoans is redefining online lending through caring service for our customers.


References

  1. “Payday Lending in America: Who Borrows, Where They Borrow, and Why” (July 2012). The Pew Charitable Trusts. https://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf. Accessed May 17, 2016.
  2. Robert DeYoung and Ronnie J. Phillips, “Payday Loan Pricing,” (Federal Reserve Bank of Kansas City Economic  Research Department, 2009), www.kansascityfed.org/PUBLICAT/RESWKPAP/PDF/rwp09-07.pdf. Accessed May 17, 2016.
  3. “CFPB Examines Payday Lending” (Jan 19, 2012). Consumer Financial Protection Bureau. https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-examines-payday-lending. Accessed May 17, 2016.
  4. Kaufman, Alex. “Payday Lending Regulation” (August 15, 2013). Divisions of Research & Statistics and Monetary Affairs. Federal Reserve Board, Washington, D.C. https://www.federalreserve.gov/Pubs/feds/2013/201362/201362pap.pdf. Accessed May 17, 2016.
  5. “FinTech Firm OppLoans Releases White Paper Distinguishing Between Predatory Payday Loans and Other Greater-Than-36% Lenders” (June 16, 2016). OppLoans.https://www.24-7pressrelease.com/press-release/fintech-firm-opploans-releases-white-paper-distinguishing-between-predatory-payday-loans-and-other-greaterthan36-lenders-424453.php#. Accessed June 21, 2016.