A decade or two ago, state legislators typically paid little attention to the issue of payday loans. However, after the financial collapse that occurred in 2007, the federal government created the Consumer Financial Protection Bureau, and the CFPB began to research payday lending almost as soon as the agency was formed. The CFPB generated a substantial amount of media coverage on the topics of payday loans, title loans and short-term installment loans. As a result, many states ramped up their efforts to curtail small-dollar consumer loans. Some states passed laws capping the interest rates that lenders could charge or limiting the number of times that a borrower could renew a loan. Other states banned payday loans altogether, leading many to wonder what life is like in states without access to easy payday loans.
States Lacking the Availability of Easy Payday Loans
As of May 2016, payday loans are unavailable in 16 states as well as the District of Columbia, according to an article appearing in the Philadelphia Tribune. Some states have enacted laws barring lenders from making short-term loans, accessing a borrower’s account to obtain repayment, charging more than the state’s usury cap or a combination of these. In other states, payday loans are not available because they would violate an existing statute, making the ban de facto.
How Financially Distressed Individuals Meet Challenges in States Without Payday Loans
A variety of organizations and researchers have conducted studies to determine the effect that banning payday loans has on consumers. The Center for Responsible Lending published a paper in August 2016 that drew on focus groups, surveys, academic studies and other research exploring the topic. According to the paper, borrowers felt that they could deal with financial shocks through various methods.
• 81 percent would reduce expenses
• 12 percent of the enlisted service members responding to a survey conducted by the Department of Defense stated that they would likely or very likely be inconvenienced if denied access to payday loans
• Service members stated that their alternatives would be to rely more on family and friends, request a loan or grant from the Military Relief Society, use their savings or reduce expenditures.
• One study that was mentioned in the paper described a study conducted in several states after payday loans were banned. The study found that there was a significant increase in the number of people who were borrowing from pawnshops.
• A study focusing on North Carolina and Montana following bans on payday loans found that there was an increase in the number of installment loans made to subprime borrowers.
In addition to the above measures, studies have found that some borrowers considered options that were even less appealing. Some stated that they might pay their bills late, use their credit cards to make an over-the-limit purchase or even write a check without available funds in the account.
Support for Payday Loan Bans Lacking Among Borrowers
Many state laws related to payday loans require that voters decide the question, and when initiatives appear on the ballots, voters tend to support them. However, a recent article appearing on PRNewswire.com reported that support for bans on payday loans is lacking among the people who actually use them. The article states that two polling firms have discovered that there is a wide discrepancy between how the general population views payday loans and how actual borrowers feel.
• 60 percent of the borrowers felt that the price of a payday loan was fair for the value provided, but only 30 percent of the voters agreed.
• 90 percent of the borrowers believed that a payday loan could be a “sensible decision” when confronted with an unexpected expense, but only 58 percent of the voters agreed.
• 49 percent of the voters said they would ask a relative or friend for a loan if they needed a short-term loan, but the plurality of the borrowers said they would opt for a payday loan.
• 80 percent of the borrowers stated that current requirements to obtain a payday loan are sufficient, but only 47 percent of the voters agreed.
• 66 percent of the borrowers do not want to lose their access to payday loans, but 47 percent of the voters believe that payday loans need to be regulated more stringently.
• 74 percent of the borrowers stated that a payday loan was the only option that was available to them when they took out their newest payday loan.
• 23 percent of the borrowers stated that they had taken out a payday loan to help one of their relatives or friends.
• 96 percent of the borrowers stated that they fully understood the fees involved as well as the length of time they would need to pay off their loan before they finalized the payday loan.
• 75 percent of the borrowers stated that they would likely recommend a payday loan to their relatives and friends.
Payday Lending Is a Complicated Topic
As you can see, despite statements from the Consumer Financial Protection Bureau, services dedicated to assisting consumers manage their credit, presidential candidates and many others, payday lending is not a simple issue. A discrepancy exists between what borrowers who use payday loans want and what others think that these borrowers need. If you would like to explore the topic of payday loans, you can find additional information at the Personal Money Store.