The Consumer Financial Protection Bureau has been in the news quite a bit recently. The agency, normally referred to as the CFPB, began working on stricter regulations for the cash advance industry several years ago. Much of the current news concerns the proposed regulations that the CFPB has announced for loans of relatively small dollar amounts that are repaid in a relatively short time. These pending regulations have received enthusiastic support from a variety of groups that decry payday lenders as unfair or even predatory. However, what many people do not realize is that there are times when cash advance loans are financially beneficial to borrowers.
Cash Advance Loans Shown to Benefit Millions of Americans
As far back as 2013, William Isaac, who once chaired the Federal Deposit Insurance Corporation, warned that strict regulations on payday lenders could end up hurting the very people that lawmakers claim that they want to protect. In a post appearing on the website for American Banker, Isaac argues that for people who face a financial crisis with no other source of funding, a cash advance loan is better than having their vehicle repossessed, their rent unpaid or their utilities disconnected. He also notes that when you compare the annualized percentage rates of payday loans to the annualized percentage rates for a bounced check or a late credit card or mortgage payment, the rates for cash advance loans are actually lower. Take for instance a borrower in Arizona, the average APR for cash advance Tuscon, when compared to typical late fees, are actually lower.
Access to Cash Loans Shown to Reduce Homelessness
In August 2016, the results of a two-year study were published in Science. The study found that a one-time infusion of cash could help keep recipients from becoming homeless for two years or more. The average cash advance funding was approximately $1,000, which is far less than the estimated $14,000 to $20,000 that taxpayers are out for a single period of homelessness for one person. Researchers found that those who received the cash were 88 percent less likely to end up homeless after three months, and this effect appeared to be sustained for two years or more. Most of the people in the study had been able to pay their rent reliably until they suffered a financial emergency due to a death in the family, an illness or a car accident. Thus, when faced with an unexpected expense, the ability to take out a cash advance loan could make the difference between having a home or ending up on the streets.
Cash Advance Loans Beneficial Following Disasters
After a natural disaster, foreclosures in California increase by 4.5 homes per 1,000, according to the results of a study published in the Journal of Financial Economics. The study found that access to payday loans mitigated between 1.0 and 1.3 of them, and larcenies were also mitigated. When stated as instances per 1,000, the numbers might seem small, but after a natural disaster, foreclosures increase by 72 percent and larcenies increase by 13 percent. Therefore, reducing foreclosures by one-fourth would represent a significant number of people who did not lose their homes following a disaster. However, if the disaster resulted in losses covered by homeowner’s insurance, the availability of cash lenders had no effect.
Cash Advances Cannot Save the Financially Irresponsible
Although the studies proved that cash advance loans can benefit financially responsible individuals who are facing an emergency, the financially irresponsible could undermine their own security. As Adair Morse of the University of Chicago noted, some borrowers habitually overspend and use payday loans to meet normal obligations or make impulse purchases. However, individuals who take payday loans when they do not really need them are very similar to those who use credit cards to make unnecessary purchases or whose checks bounce as a result of their financial irresponsibility. Using any credit product without considering the future consequences can be disastrous, but for responsible individuals who have a plan for repayment, cash advances are no more hazardous than any other form of credit.
Paige Marta Skiba, a law professor at Vanderbilt University, notes that other sources of quick cash could be even less desirable. In an article appearing on TheConversation.com, Skiba, who has been researching alternative financial services such as payday loans for 15 years, found that alternatives are typically even less transparent and have fewer regulations than cash advance loans. Skiba states that if regulators eliminate payday loans, consumers will likely turn to a more expensive option. Like Morse, Skiba’s research found that when used appropriately and repaid promptly, cash advances allow certain individuals to manage their cash flow in ways that would be difficult or impossible to achieve otherwise.
You can learn more about cash advances at the Personal Money Store from the informative articles posted on the site about payday loans and other credit products.