Payday Loans — Like Them or Not, They are Needed by Millions
In recent years, the payday loan industry has been receiving a great deal of attention from legislators at the federal and state levels as well as from consumer “watchdog” agencies. Politicians and agency heads have decried payday loans as “usurious” and “debt traps,” accusing cash advance lenders of “preying” on vulnerable consumers. However, whether politicians like the concept of payday loans or not, they should not lose sight of the fact that these types of loans are needed by millions of Americans.
Payday Loans Provide a Necessary Service to Millions
Emergencies happen. Cars need to be repaired, a child needs medical attention, a roof develops a leak or some other event occurs requiring an immediate outlay of cash. Many Americans can solve the problem by using a credit card, borrowing from their parents or tapping into their savings. None of these options, however, is available to millions of people.
• A 2014 article in the Wall Street Journal reported that 26 percent had no emergency savings. The following year, USA Today published a report stating that 34 percent lacked any type of emergency savings.
• The results of a study released in 2015 by the Consumer Finance Protection Bureau, or CFPB, showed that approximately 26 million adults do not have any type of credit history, while an additional 19 million people have credit histories that cannot be scored due to incomplete, limited or stale data. Thus, about 45 million people do not have credit histories sufficient to obtain a bank loan or credit card. It is interesting to note that the CFPB has been leading the efforts to regulate the payday loan industry despite the fact that the agency’s own studies prove that such loans are the only option available for many Americans.
• The average payday loan borrower is between the ages of 25 and 44, according to research conducted by the Pew Charitable Trusts. At the upper end of the age bracket, many are helping to support aging parents while simultaneously supporting their own children. At the younger ages, the borrowers’ parents may be facing the dilemma of helping their own parents or helping their adult children. What this means is that for millions of people, parents are not a viable option for financial support.
All Americans are not Financially Equal
The population of the United States is not a financially homogenous blend. The median per capita income for 2014 was $28,889, according to the most current information obtained from the Census ACS survey. This means that half of all Americans make less than $28,889 per year and half earn more. Those who are at or below the median income will naturally have more trouble saving for emergencies as well as fewer options for obtaining credit from traditional lenders.
How Proposed Regulations Will Hurt Millions of Americans
What many people do not know is that up until 2013, several banks offered a product similar to payday loans called an advance deposit loan. In 2013, the Office of the Comptroller of the Currency, or OCC, issued regulations on these types of loans that resulted in virtually every bank opting to stop offering these loans. The new rules included six-month reviews of the borrower’s financial situation to see if it had improved, a minimum of one month between loans, underwriting to verify that borrowers had the means to repay the loan and a limit of one loan per month.
The CFPB is now proposing similar — but even more stringent — regulations for the payday loan industry. The new underwriting rules include a minimum of 60 days between loans and a regulation prohibiting further loans for a full year unless borrowers can prove that their financial situation has improved.
The OCC regulations practically guaranteed that most borrowers would not qualify for advance deposit loans. The proposed CFPB regulations will have the save impact on the payday loan industry. Simply stated, borrowers who can meet the qualifications will be those who have access to other credit products. Millions of people, however, who do not have the same access to credit will be left with no legal source of funds to meet a financial emergency.
CFPB Admits Payday Loans are Necessary for Many Americans
The regulations proposed by the CFPB could put an end to the payday loan industry. However, even Richard Cordray, the director of CFPB, has stated repeatedly that millions of Americans need access to small-dollar loans and that most of them cannot obtain the funds from relatives. Despite this, the CFPB is continuing to proceed with regulations that could sever the lifeline that payday loans provide for millions of people who rely on these loans to meet unexpected financial expenses. At the very least, the CFPB should eliminate the proposed regulations that could cause great harm to millions of Americans and look for other ways to ensure the protection of consumers — without destroying yet another financial tool that many people need to survive.
A payday loan can be a viable option for many borrowers who need a relatively small amount of money for a short term. Payday loans, however, are not the perfect solution for all financial problems. If you would like to learn more about payday loans, you can find additional articles at PersonalMoneyStore.com.