Valerie R. Wilson is an economist and director of the race, ethnicity and economics program at the Institute for Economic Policy.
Payday loans are touted as a quick and easy solution to temporary cash flow problems. But most borrowers take out these small loans to meet expenses that don’t go away. Since few borrowers improve their economic situation before the loan matures, most have to take out another loan or incur costs to defer repayment.
Ban predatory interest rates. Hold borrowers to account for their repayment capacity. Limit the duration of debt and restrict lenders’ access to bank accounts.
A Consumer Financial Protection Bureau study indicates that 82% of loans are renewed within 14 days. A Pew study found that the average borrower takes eight loans of $ 375 each per year, spends $ 520 in interest, and incurs payday loan debt five months a year – well beyond the two-week obligation. promoted by payday lenders.
According to the Federal Reserve Bank of Kansas City, “the profitability of payday lenders depends on repeat borrowing.” The chronically cash-strapped customer base on which these lenders thrive disproportionately include those earning less than $ 40,000 per year, people with less than a bachelor’s degree, and African Americans. African Americans make up 23% of payday borrowers, but only 12% of all American adults.
This asymmetry between the economic vulnerability of borrowers and the profitability of lenders opens the door to predatory practices. Lenders typically charge the equivalent of an annual rate of nearly 400% – which would have been banned before states exempted these companies from laws banning small dollar loans and banning usurious interest rates.
Existing regulations vary widely from state to state, and a consistent set of federal rules would help eliminate abuse. It begins with Congress setting a non-predatory annual rate cap, as it did with the 36% cap set for members of the military in the Military Loans Act of 2006.
In addition, the consumer office has the power to make rules that require lenders to consider a borrower’s repayment capacity, limit the length of payday loan debt allowed over a 12 month period. and prevent lenders from demanding direct access to borrowers’ current accounts. (by post-dated check or electronic access) as a condition for granting credit.
Finally, the repeat business that drives the profitability of payday lenders is an indication that the economy is not producing adequate wages for people to live on. In addition to direct changes to industry rules, economic policies that go a long way towards promoting full employment and higher wages would go a long way in reducing the demand for payday loans in the first place.
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