Payday Loan Market Shrinks 23% in 2016
Storefront and online payday loans decreased 23 percent in 2016, according to information released by the Center for Financial Services Innovation, also known as CFSI. Some of the decline is due to payday loan borrowers shifting to bad credit installment loans or other subprime credit products. However, the CFSI study also revealed some alarming statistics that indicate that financially underserved Americans are incurring substantial fees for products other than a payday loan or cash advance loan.
What Is Behind the Drop in Payday Loans?
The Consumer Financial Protection Bureau, an independent federal agency created in 2011 as a result of the financial crisis of 2008, has accused the payday loan industry of “unfair or abusive” practices almost since the day the agency opened its doors. In 2015, the CFPB announced that it would propose new regulations for short-term loans, including bad credit payday loans, auto title loans and certain personal installment loans. Many payday lenders began shifting their focus from payday loan products to installment loans. Installment loans have traditionally been more attractive to borrowers; with longer repayment terms and lower monthly payments, installment loans were a more budget-friendly option for many borrowers. By the time that the CFPB released its formal proposal in June 2016, many borrowers who would have chosen a payday loan in previous years found that they could now choose an installment loan.
However, the shift to installment loans was not the only reason for the decline in both storefront and online payday loans. In August 2016, CNBC reported that during the previous year, 10 million new credit cards were issued. Approximately 60 percent of these new accounts were for borrowers considered subprime, meaning their credit scores were below 660. In the years immediately following the 2008 crisis, these subprime borrowers would have had difficulty securing approval for a credit card, making them ideal candidates for bad credit payday loans.
Personal marketplace loans, according to the CFSI study, rose 210 percent during 2016. This category includes peer-to-peer lending sites that serve as a clearing house to bring investors and borrowers together. However, because the concept of marketplace lending has no universal definition, some analysts also include installment loans from traditional sources such as credit unions and banks.
CFSI Study Reveals Troubling Statistics
According to the CFSI study, 67 million Americans have no bank accounts or rely on alternative financial services, such as online payday loans and check cashing services. Therefore, they often pay significantly more for services than people with bank accounts.
Underserved consumers also spent considerably more on auto insurance; for cars of comparable value, premiums averaged 26.5 percent more for the underserved than for those who were fully served. In 2015, underserved Americans spent $36.5 billion on auto insurance, compared to $24 billion for the payments and interest on subprime auto loans.
Is Subprime Borrowing Another Disaster in the Making?
According to the CFSI study, marketplace loans and subprime credit cards accounted for $26.2 billion in debt, and these types of credit products continue to grow at a much faster rate than bad credit payday loans and other single-payment credit products. This has some analysts worried about what this trend could mean.
In December 2016, CUInsight.com published information from a forecast prepared by TransUnion. TransUnion predicts that a combination of more subprime borrowers and expected increases in interest rates will lead to a rise in delinquency rates for credit cards and auto loans in 2017. The report stated that subprime credit card accounts have reached their highest level since December 2010, and subprime auto finance accounts are at their highest point since the end of 2013. In contrast, mortgage delinquencies declined 60.8 percent over the last five years and are expected to continue to decline in 2017.
TransUnion also reported on a difference in financial philosophy between prime and subprime borrowers. Borrowers in the prime category are reducing their debt, but subprime borrowers are increasing the balances on their credit cards. Total balances reached $662 billion in 2016, a 6-percent increase over 2015 and $82 billion more than in 2013.
If TransUnion’s information is accurate, this means that subprime borrowers account for the bulk of the increased totals owed on credit cards. In 2017, serious delinquencies on credit cards and auto loans are expected to reach the highest levels since 2012. Although these delinquency rates are much lower than they were during the recession following the financial crisis of 2009, the trend certainly bears watching.
Struggling Americans Need Better Options
When all of the information discussed in this article is assimilated, one fact becomes obvious: Many Americans are struggling financially, and they need better options. The pending CFPB regulations are so burdensome that even the Credit Union National Association, the Independent Community Bankers of America and the National Association of Federal Credit Unions have objected.
The CFPB regulations could make payday loans impossible to obtain, at least in their current form. However, as Norbert J. Michel points out in his article appearing on Heritage.org, the federal government is actually subsidizing bad credit payday loans’ competition. Under the Dodd-Frank Act, the law that also created the CFPB, there is a provision to issue grants to banks and nonprofits so that they can offer more small-dollar loans. Another section provides for grants to “community development financial institutions” — which are groups funded by taxpayers — to offer loans of as much as $2,500.
Since the lenders who offer storefront and online payday loans are private companies, they do not qualify for any federal assistance or grants. Instead, these lenders are the ones saddled with the high costs of complying with the new federal regulations. Bad credit payday loans could become obsolete, and if that happens, the 12 million Americans who rely on them to weather financial setbacks will have few options left.
Credit unions have already told the CFPB that the regulatory burdens will likely make it impossible for many of them to make small-dollar loans at the interest rates mandated without losing money. Banks make far more money by issuing large-dollar loans, and since the underwriting costs would be approximately the same for loans of $500 and $50,000, they are not likely to be inclined to offer a payday loan type product. Besides, banks did try the small-dollar loans before. They were called direct deposit advances, but after the Office of the Comptroller of the Currency and the FDIC issued a “guidance document” that effectively told the banks that they should stop offering these loans, direct deposit advances disappeared. Furthermore, many of the borrowers seeking bad credit payday loans would not qualify for a bank loan.
The CFPB has offered little in the way of suggested alternatives to payday loans. The agency also seems oblivious to the damage that eradicating the payday loan industry can cause to millions of consumers who have little or no access to other credit products. Given the other problems that underserved Americans are dealing with, removing the option of a payday loan could be tantamount to severing a much-needed financial lifeline.
To Learn More
The payday loan issue is complex, and like all complex issues, there are no simple answers. If you would like to learn more about the various credit products available to you, including online payday loans, you can find helpful articles at the Personal Money Store.