As states try to get rid of payday loans, other types of loans pop up in their place. Photo Credit: AR McLin/Flickr.com/CC-BY

Virginians frequenting pawn shops and title lenders more

Many states have passed laws intended to closely regulate, if not outright eliminate, payday loan lending. However, such laws don’t eliminate the need or demand for a short term credit product. The state of Virginia passed laws several years ago capping the interest rate on payday loans, which has reduced use of that particular product but not demand for financial help. Up to 10 percent of all Virginia households were estimated to have used some sort of alternative financial service, according to BusinessWeek, in a recent study done by the University of Virginia. Four percent of Virginians reported using payday loans at some point and 3 percent frequent pawn shops. Between 2004 and 2008, 70,000 Virginian households used refund anticipation loans and between 2005 and 2009, almost 150,000 Virginians used car title loans.

New class of lenders

Some of the most frequent laws passed against payday lending mandate loan repayment be done over a period of more than two weeks. The state of Colorado passed a law a year ago making the repayment period six months instead of a couple of weeks, according to the Greeley Gazette. As a result, former payday loan lenders are offering six month installment loans. When Arizona let the law allowing payday lenders to lapse in 2010, many thought that payday lending would disappear. Instead, according to the Arizona Republic, many stores simply started offering car title loans instead. In February of this year, a bill was introduced to the Arizona legislature that would authorize installment loans at higher-than-normal interest, as many consumers still need a source of short term credit. North Carolina, according to BusinessWeek, just approved a bill authorizing installment loan lenders to charge more than 36 percent interest on loans up to $1,500.

Supply and demand still rule

Though there are many products that a lot of people find less than palatable, such as payday loans, there is obviously still a demand for these products. A lot of people who don’t have access to bank credit find themselves short in between paydays or have an emergency come up that they didn’t plan for. Then they have to seek out alternative financial service providers in order to get the credit they need. Because many of these lenders don’t benefit from the kind of protections banks enjoy, they have to charge higher interest rates in order to stay open. It is undeniable that there is a demand for these types of short term credit.

Sources

BusinessWeek on VA

Greeley Gazette

Arizona Republic on payday loans leaving

Arizona Republic on new loan bill

BusinessWeek on North Carolina

Illinois Lending Corp. says the installment loans provisions of the Illinois Payday Loan Reform Act are unconstitutional. (Photo Credit: CC BY-ND/Jamison Faught /Muskogee Politico)

Beginning March 21, Illinois consumers may not have the option to choose installment loans for their emergency short term credit needs. At least one payday lender in the state is not taking what it calls unconstitutional changes lying down, reports Crain’s Chicago Business. Illinois Lending Corp., which operates six Chicago-area payday loans outlets, has filed suit in Cook County Circuit Court, claiming that its business will be irreparably harmed if the slightly longer-termed installment loans are not allowed.

Prohibition of installment loans

Unlike payday loans, installment loans have a slightly longer term, offering consumers repayment flexibility at an additional fee. This applies at the customer’s discretion, should the standard two-week payday loan term be insufficient. According to Illinois Lending Corp., prohibiting installment loans violates the company’s constitutional rights to due process and equal protection.

As it stands, two of the more problematic parts of the new Illinois Payday Loan Reform Act for lending corporations like Illinois Lending Corp. are:

• Borrowers cannot have installment loans for more than 45 days
• A new 56-day repayment period at no additional charge for borrowers who have trouble repaying

While payday lenders are not looking to exploit borrowers who are having difficulty repaying, giving them a 56-day installment loan with no finance charge attached is untenable, says Illinois Lending Corp. The company’s 2010 business records show that it made more than 7,000 installment loans and about 700 payday loans last year.

Eliminating consumer choice

Illinois Lending Corp. is asking the court to block the provision within the Illinois Payday Loan Reform Act that would bar payday lenders and their affiliates from offering installment loans.

“There is no evidence that consumers have been injured where both (installment and payday) loan products are offered in the same place of business,” the lawsuit states.

Consumer advocates want to maintain fragile compromise

Lynda Delaforgue, co-director of Chicago-based consumer advocacy group Citizen Action/Illinois, believes that if the court grants an injunction against any portion of the Illinois Payday Loan Reform Act, the other compromises struck between the short term credit industry and the state will be torn down.

“There’s the potential for consumers to be bounced back and forth between the (consumer installment and payday) products,” Delaforgue told Crain’s.

However, by uniting the products by offering both under the same roof, payday lenders say they’re offering consumers both convenience and choice. The Illinois Payday Loan Reform Act arguably threatens consumers on both grounds. Consumers who have difficulty obtaining emergency short term credit elsewhere depend upon payday loans and installment loans, according to numerous studies.

Sources

Crain’s Chicago Business
Debt Consolidation Care Forum
Illinois Payday Loan Reform Act

Restricting credit hurts consumers and payday lenders

Payday lenders in Texas are facing possible new regulation. Image: Flickr / stallio / CC-BY-SA

In Texas, there are more than 3,500 payday lenders. Two new pieces of legislation — Texas SB 253 and Texas HB 410 — have been introduced as a way to limit this short-term lending. Both of these bills seek to redefine “Credit Service Organization” to exclude payday loan stores.

The Credit Service Organization exemption

Texas law currently limits consumer credit and financial institutions. Payday loan stores currently operate under the name umbrella of a “Credit Service Organization.” This is because payday loan stores offer a form of short-term credit that is available to those without a credit history or with a bad credit history. This particular exemption does not make a differentiation between check-cashing services — which provide services to those without banks — and payday loans — which provide services to those who don’t have access to the credit they need.

Effect of Texas payday loan regulation

The two bills that have been introduced in the Texas legislature re-define “Credit Service Organization” to specifically exclude payday loan stores. This would limit the fees that these stores can charge based on an annual percentage rate. Industry estimates are that somewhere between 3,000 and 6,000 of the 7,800 employees at payday loan stores in Texas would lose their jobs. It would also reduce the amount of available credit to customers who use payday loan stores.

Welcoming additional oversight

Though Texas payday loan stores and lenders have come out against Texas SB 253 and HB 410, they have said that they do welcome further regulation and oversight. Short-term credit available through payday loan stores is distinct, as it is a style of consumer credit that banks, credit cards and credit unions simply do not usually offer. The payday loan industry claims that it provides a useful and needed service. Lawmakers express concern over the interest rates, which usually clock in at less than a credit card cash advance.

Sources

Texas SB 253 (PDF)
Texas HB 410 (PDF)
KXAN
Payday Lending Statistics report

Montana's lawmakers will not have much say if I-164 passes. Image: jimbowen0306 / Flickr / CC-BY

The debate about payday lending and allowable interest rates has reached Montana. Initiative 164, a citizen’s initiative, will be on the ballots that start going out today. If the ballot measure passes, many short-term lenders say it will put them out of business.

How lending in Montana is currently regulated

The way payday lending and short-term credit currently works in Montana, there are limits. A lender can charge only a one-time fee for a short-term loan. If the check or payment bounces, the lender will be allowed to charge one bounced-check fee. Ongoing interest on an unpaid balance cannot be charged. Montana also currently forbids a customer from having multiple payday loans at the same time. Montana’s current regulation is some of the strictest in the nation.

What I-164 in Montana would change

Montana’s I-164 is a citizen’s initiative that would cap annual percentage rates at 36 percent. Similar to Arizona’s “Operation Sunset” and regulations in other states, this would be based on annual percentage rate calculations. Owners of short term credit businesses in Montana say that this new regulation would simply put them out of business.

How I-164 would affect title lending

Auto title lending, where the short-term loan is guaranteed with a vehicle, would also be affected by Montana’s I-164. Under current law, title lenders are allowed to charge up to 25 percent of the loan amount as a fee on a title loan. Auto title lending would also be strongly regulated by I-164, limiting the ability of lenders to repossess vehicles.

Arguments behind I-164

There are mixed reports as to if I-164 will actually be passed by Montana voters. In reality, though, the arguments for and against the regulation are very similar to the arguments for national regulation. The problem, though, is that annual percentage rate is not a legitimate way to measure the interest rate of these short-term loans. Many of the other payday lending statistics used to support these new regulations are simply not supported by the facts.

Smartphones may be taking the place of credit and debit cards soon. (Photo Credit: CC BY/Edmund Jenks/Symbology)

Banks and credit card companies have made a great deal of money off consumers who have depended upon them for both impulse and emergency purchases via short term credit. However, there may soon be a way for consumers to escape the wheel of revolving interest debt if AT&T and Verizon Wireless have their way. According to Bloomberg, the swipe-and-pay “PayPass” technology used on some smartphones is ready for a revolutionary – many say evolutionary – step. Smartphone pay for purchases and bill pay may become a reality soon, making credit cards and even debit cards obsolete. Mobile billing via the wireless carriers would simply place charges on the consumer’s monthly wireless bill.

Smartphone pay threatening Visa, MasterCard

A proposed partnership between AT&T, Verizon Wireless and T-Mobile would work through Discover Financial Services and the Barclays banking conglomerate. Consumers would be able to pay with a “contactless wave of a smartphone,” according to the Bloomberg report. Considering the growing popularity of smartphones in the United States, more than 1 billion plastic cards could be in danger of hitting the junk drawer if smartphone pay takes off as experts predict it will. Wireless technology consultant Richard Crone called the proposed payment technology a “game-changer” that will fit naturally into the mobile billing industry, as America’s carriers are “the biggest recurring billers in every market” and they are “experts at processing payments.”

What Visa and MasterCard stand to lose

Visa and MasterCard combined handled $2.45 trillion of U.S. consumer spending on general-purpose cards in 2009. That’s 82 percent of U.S. spending within that market, according to industry newsletter Nilson Report. That kind of dominance contributed to $3.54 billion operating income for Visa and $2.27 for MasterCard last year. ATM interchange fees (aka swipe fees) on debit card purchases also generate a significant amount of money for banks, as much as $40 billion per year. Smartphone pay won’t completely replace credit cards, as mobile billing won’t necessarily offer revolving credit, but debit cards in particular could be severely damaged. Short term credit such as payday loans could show  significant gains against credit cards, particularly through mobile applications.

Younger consumers leading the charge

A study by Boston-based consulting firm Mercatus LLC indicates that 80 percent of consumers between 18 and 34 years of age are ready to begin using smartphone pay and similar mobile financial services. There are retail barriers that must be overcome first, according to the Federal Reserve Bank of Boston, but there would also be incentives. According to Bloomberg, it costs retailers approximately $200 for each credit card reader. If smartphone pay becomes universal, that would save retailers money and only cost smartphone manufacturers another $10 to $15 per handset. Retailers would also likely be able to send rewards and other information directly to consumers via the smartphone pay interface.

Sources:

Bloomberg

Federal Reserve Bank of Boston

Your smartphone can also serve as a retail credit card terminal

What are the minimum requirements?

If you have a valid social security number and a steady job, you may qualify for easy cash loans. Online payday lenders typically require that you:

• Have a valid social security number
• Be at least 18 years old
• Have a permanent street address
• Be currently employed
• Be employed at your current job for three to six months, depending on the lender
• Have a minimum income of about $1,000 a month, depending on the lender
• Have a valid bank account with direct payroll deposit

What about credit checks?

One of the main goals of payday lenders is to provide short-term credit to people who might not otherwise be able to meet lending standards because of credit problems. Credit reports are rarely required for easy cash loans, although many payday lenders do obtain consumer reports from Teletrack.

What is Teletrack?

Teletrack is a consumer reporting agency operating under the Fair Credit Reporting Act, the same federal law that governs the three major credit-reporting agencies. The consumer information provided by Teletrack is obtained from payday lenders, rent-to-own businesses, furniture stores that provide financing, cable and telecom companies, non-prime lenders and credit unions.

Will a Teletrack report show up on my credit history?

Unlike reports from Equifax or the other major credit-reporting agencies, a consumer report from Teletrack will not show up on your credit report and will not affect your credit score. Payday lenders use Teletrack to verify the information provided by borrowers and to avoid fraudulent applications, but they don’t use them to access credit histories or to determine credit scores.

Should I apply?

Yes! What is there to lose? Remember that payday lenders are in the business of making easy cash loans to people with credit challenges just like yours. Some lenders even offer installment loans for bad credit. When you apply at Personal Money Market, you’ll instantly be matched with the best payday lender for your needs, and you’ll find out right away whether your application is approved. If you meet the lender’s minimum requirements and your application is honest, chances are good you’ll soon have the extra cash you need.

Apply for Easy Cash Loans | Start HERE!

A FICO report shows a record number of people in the lowest credit score categories, and tighter lending standards make short-term credit alternatives a lifeline for millions of consumers. Flickr photo.

Credit scores are falling to new lows for millions of Americans. Lower credit scores and tighter lending standards have economic recovery caught between a rock and a hard place. Figures provided by FICO Inc. show that 25.5 percent of consumers — about 43 million people — now have a credit score of 599 or below. These consumers probably won’t be able to get the affordable mortgages, auto loans and credit cards that economic recovery is depending on.

Millions fall into lowest credit score categories

Along with a high unemployment rate and depressed home prices, plunging credit scores seem to be canceling out what should be positive things like record low mortgage rates and no-interest auto loans. The Associated Press reports that FICO’s findings show an additional 2.4 million people fell into the lowest credit score categories during the Great Recession. Historically, just 15 percent of 170 million consumers with active credit accounts, or 25.5 million people, fell below 599. Borrowing for these consumers is often limited to short term credit alternatives such as installment loans, personal loans and payday cash advances.

A lifeline for people with low credit scores

Already at record lows, the number of consumers with credit scores below 599 is expected to increase. The Associated Press article indicates that it can take several months before missed payments drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed. Millions more face mortgage foreclosure, which can delete 150 points from a credit score. Once the damage is done, it could be years before this group can restore their credit scores, even with a strong short-term credit history. Fortunately, with access to short term credit alternatives, they won’t be completely left out in the cold.

Lending standards lowering credit scores

Leave it to banks to do their part to lower credit scores. Creditcards.com reports that by cutting credit lines and increasing interest rates, banks are lowering their customers’ credit scores. This happens because FICO scores compare debt levels to credit limits. Lower credit lines make it look like a borrower is closer to being maxed out when they haven’t increased their debt at all. Plus, higher interest rates make it tougher to pay off existing debts. And for a personal loan to help pay the bills, they can forget about talking to their bank.

Can the  economy recover without easy credit?

Consumer spending based on credit fueled an unsustainable U.S. economic boom that was destined to bust. Considering the latest FICO report on record low credit scores, it’s no wonder a U.S. economic recovery is stuck in neutral, according to the Dallas News. consumers who can’t borrow money can’t buy houses and cars, invest in home improvements, or make other major purchases that drive economic growth and give businesses reasons to hire workers and ramp up production. For credit scores to improve, the economy has to recover and Americans have to change their spending habits. For an economy driven by consumer spending, that will be an amazing feat indeed.

Most credit unions won't give you a duck. Most credit unions won't give just anyone short term loans, either. (Photo: Picasa)

Short term loans and similar money loans have been a thorn in the side of banks and credit unions who have sought to gain a foothold as direct lenders in the short term credit market. Payday lenders have addressed the consumer need for quick cash with aplomb, making successful entry into the market perhaps more difficult for traditional financial institutions. As a recent study by UC David Ph. D. Victor Stango entitled “Are Credit Unions Viable Providers of Short-Term Credit” suggests some of the reasons why credit unions (and by extension, even traditional big banks) aren’t mounting any serious completion for payday lenders.

Short term loans just as expensive at credit unions – or even pricier

Stango points out that there simply isn’t a preponderance of evidence proving that short term loans are a viable product for credit unions. To be competitive and hence profitable for a credit union, short term loans must be priced lower than that of payday lenders. In addition, requirements and terms must be attractive to consumers. Having low cost but being riddled with red tape won’t work, and if the price is too high, consumers will look elsewhere.

Fees within fees at credit unions

Of the 7,749 credit unions covered in Stango’s study, only six percent even attempted to offer short term loans to the public. That’s 479 credit unions. Of those, the initial short term loan APR was generally lower than those of most payday lenders surveyed, but not so much that it made a great deal of difference. However, many of the credit unions with lower loan APRs actually had additional loan origination fees that made the cost difference either negligible or tipped it in favor of the payday lenders.

Why did only six percent of credit unions offer short term loans?

The vast majority of credit unions contacted by Stango’s assistant actually refused to explain why they do not offer short term loans. The few who were willing to go on record claimed short term loans were either “too risky” (too many delinquencies), there was “insufficient demand” (which seems unlikely, considering the wide market for short term loans from payday lenders) or “interest rates are too high” (perhaps creating a lack of demand, at least for short term loans with traditional financial organizations).

Federal credit unions are shackled by federal law

Federal credit unions can charge a maximum of 18 percent APR on a loan, which means that for every $100 loans, that would be an interest charge of $1.50 per month. Even if every customer repaid their short term loans on time, that simply isn’t enough to make the product viable for credit unions. Some credit unions have proven able to get around that cap and raise the bar to 36 percent APR, but in almost every case, additional fees are necessary for them to even break even with short term loans, Stango discovered.

Strict standards

In addition to the problems of cost, most credit unions in Stango’s study require that borrowers be members of the credit union for at least 60 to 90 days. Also, if the customer has made any late payments on other loans or filed bankruptcy, they are generally found to be ineligible for short term loans before taking a payday loan. For all of the reasons stated here from Stango’s study, short term loans are simply not a viable product. Payday lenders can provide short term loans and other forms of money loans at somewhat lower cost and with much less administrative hassle.

Source:

“Are Credit Unions Viable Providers of Short-Term Credit?”

Related Video:

Payday loans are priced based on free market principles, yet some try to make invalid comparisons between cash advance fees and interest rates for home and auto loans. Flickr photo.

Interest rates are the issue that payday loan opponents rely on most often. Anti-payday loan activists compare interest rates on payday loans with the interest rates for other financial products such as auto loans or home mortgages. Payday loan opponents make these comparisons because it’s the easiest way for them to support their arguments. The truth isn’t so obvious. Payday loans, and everything about them, are so different from loans for cars or houses that putting them in the same category as longterm loans makes little sense.

Cash loans no credit check

Payday loans, payday loans online and installment loans for people with bad credit fill an important role for consumers. These types of short-term financial relief are available in so many ways because there is a big market for them. During the recent, historically severe recession and what is so far a weak, jobless recovery, more people than ever need convenient access to short-term credit for money emergencies. While the market creates the environment for financial options like payday cash advances, it also determines the interest rates associated with these products.

Payday loans: value vs. price

Payday loans are like any product or service traded in a free and open market. For a product or service to be sustainable, the market creates a delicate balance between price and value. These rules apply to the interest rates applied to any financial product, from auto loans to mortgages. As long as payday loans deliver value for the price,consumers will continue to use them. As long as it’s worthwhile for payday loan companies to offer short-term cash solutions, they will continue to offer them.

Short term loans and the free market

Banks and car dealerships will set interest rates in search of optimum levels of customers and profits. If business starts falling off, their rates may be too high and they adjust accordingly. But no bank or car dealership will set interest rates that make it impossible to remain profitable. Most people would consider it outrageous if the government forced banks or auto dealerships to do that. But strangely enough, that’s what anti-payday loan activists would like the government to do to payday lenders, even though such measures were recently rejected as part of the big financial reform bill.

Right price, right now

For example, let’s say a payday loan costs about $15 to borrow $100 for two weeks. For millions of payday loan borrowers, that fee is appropriately set, based on the purpose of the transaction. A payday loan is a short term financial solution that is paid off in two weeks. For a person in a financial emergency, it’s worth it to pay $15 dollars in the short term to avoid long term financial problems such as credit damage or repossession. Responsible payday loan borrowers understand that it’s worth the cost if the payday loan is paid in full at the end of the term.

Comparing apples to oranges

Payday loan opponents use that $15 per $100 ratio and apply it to unrelated financial products like auto loans and mortgages, which use an annualized percentage rate (APR). In this case, the APR on the $100 payday loan would be in triple digits if a borrower strung it out for a whole year. Listening to these arguments, politicians are proposing that APR should apply to payday lenders, and the APR on payday loans should be capped at 36 percent. While a 36 percent interest rate would seem unusually high for a car loan or a mortgage loan lasting many years, it’s not enough to support small, short term loans lasting two weeks.

Fair market price

Direct payday lenders would not be able to make credit available to their customers if they offered 36 percent APR. The Richmond Times Dispatch reports that at 36 percent APR, the total fee charged on a $100, two-week cash advance would be $1.38. At that rate, payday advance lenders could not cover the cost of originating the instant payday loans, let alone meet employee payroll, benefits and other business expenses, like rent. The fees on payday loans are largely determined by how much they cost the lender to offer them. Like any business, profit from the transaction must be part of the equation. Millions of satisfied payday loan borrowers agree.