If Payday Lending Ends, What Replaces It?

Payday lending has been attacked from many quarters because the industry is an easy target in today’s media-savvy, soundbite culture. The Consumer Financial Protection Bureau, or CFPB, has been tasked with recommending financial reforms, and despite limits to its powers that include not being empowered to set interest rate caps, the agency has arbitrarily recommended a 36-APR limit.

Knowledgeable experts in finance–including those of the major banks–insist that this limit is impractical and unprofitable for companies that want to offer short-term or payday-type loans. If this kind of lending becomes unprofitable or is simply banned, what might replace it? A CNBC.com quotes the Community Financial Services Association of America–a group of payday lenders–that calls the regulations a “staggering blow” to consumers.

Losing the Payday Lending Option Introduces Unknown Risks

The banking industry, which once gleefully anticipated offering lucrative new loan products if payday lending were banned, can’t offer workable alternatives to payday loans under the CFPB’s proposed interest rate limit. People from lower income brackets–and even those with higher incomes but poor credit–don’t have access to credit and loans from traditional money sources like banks, so the end of payday lending could prove catastrophic to many families. Consumers depend on easy-to-get loans for their emergency cash needs, and possible replacements for payday lending include:

  • Risky Borrowing Practices
    Getting unlicensed loans from criminal elements in America’s communities increases the risks of paying exorbitant interest and risking personal safety if the loans can’t be repaid.
  • Accessing Retirement Accounts
    Many people will be forced to access their retirement accounts, but they face substantial tax penalties if they don’t repay the money in 60 days.
  • Pawn Shop Loans
    People routinely lose valuable family heirlooms when they pawn them for fractions of their value at neighborhood pawn shops. These shops typically earn higher returns than payday lenders.
  • Retooling the Payday Loan Industry
    Many payday lenders might retool their products and offer installment loans over longer repayment periods. This option will probably cost more in interest over time but could help to manage emergency short-term expenses.
  • Traditional Lenders Expanding into Fringe Financial Services
    Banks and other traditional lenders can offer expanded short-term loan options, but even they struggle to make these loans profitable due to their high default rates and limited repayment periods to earn interest. These loans will be harder to get and probably be financed for longer repayment periods. Banks are more highly regulated than payday lenders, and the interest from short-term loans just can’t cover the costs of processing loan applications, running credit checks and underwriting default risks according to a Dispatch.com report.
  • Google-Based Loans
    Many analysts have been surprised by Google’s decision to ban payday loan advertising, which the company accepted for many years while growing into a business juggernaut. It’s been revealed that Google owns a payday-type lending organization. Could Google be planning to offer expanded payday loans in an attempt to leverage a bigger part of the lucrative short-term lending market?

Bans of Payday Lending Could Rip the Fabric of Contemporary Life

WashingtonPost.com reports that the CFPB regulatory proposals would eliminate 80 percent of payday lending in its present form. The payday lending industry developed after states deregulated interest rates and has grown into an $89 billion industry. When an industry is that lucrative, it’s easy to see why payday loan offices have become more common than McDonald’s franchises.

Many people have come to depend on this source of emergency cash, and taking away the supplier won’t curb the need. Almost all the alternatives to payday lending would necessarily concentrate on longer repayment periods and greater lending restrictions based on each borrower’s credit score, so disenfranchised people will face the same problems securing these loans as they would in getting credit from traditional loan sources.

All the alternatives to payday lending would force disenfranchised consumers to suffer embarrassment, attempt risky borrowing practices or receive denials of their applications for emergency cash. The tradeoff of paying higher interest rates for short-term payday loans includes borrowing anonymity and almost universal availability to people regardless of their credit scores, employment history and debt obligations.

Informed Supporters of Free Enterprise Wonder What’s Next

The free enterprise system–left on its own–resiliently deals with companies that overcharge consumers or engage in unethical practices, but government overreach threatens broader consequences for multiple industries that include the traditional establishment’s banks, investors and lenders.

Without access to emergency funds, people might choose riskier financing alternatives, or traditional lenders might start financing short-term installment loans. Payday lenders would be forced to consider alternative loan products that are financed over longer repayment periods to make their lending activities more profitable, which opens possibilities for providing many of the same financial services that banks, credit unions and savings and loan associations offer their customers.

The real-world results will probably include retooling of payday loans, greater participation in short-term lending by traditional finance companies, increased pawnshop lending and more loans offered by organized crime in communities throughout the country. Find out more about payday lending and its alternatives at the PersonalMoneyStore.com.

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