Report Guides Lawmakers on Payday Loan Regulation (Nov. 5, 2013)
Borrowers of short-term and payday loans use up to an average of 36 percent of their periodic wages to pay back those loans—far more than they typically can afford, according to a new report from The Pew Charitable Trusts, which calls on regulators to make such loans safer and more transparent. “Payday Lending in America: Policy Solutions” is the third in a series of reports from Pew aimed at providing information to lawmakers as they evaluate ways to make small-dollar loans work better for borrowers. In the report, Pew stopped short of condemning all such loans; instead, the organization said that research was “unclear on whether high-interest small loans are beneficial to consumers with poor credit histories, but better regulation is needed regardless.”
Among the biggest issues with payday loans, according to the Pew study, are the high fees and interest rates that come tacked on, which easily can lead to a cycle of re-borrowing as borrowers are forced to take out new loans to pay off the fees and interest from previous loans. The report found that the typical small-dollar loan customer has to re-borrow money every two weeks, spends five months of each year in debt and ultimately pays $520 in fees on an original loan of $375. To combat the cycle of borrowing, the Pew report urged lawmakers in states that permit payday loans to enact regulations that: limit payments to an affordable percentage of a borrower’s periodic income; spread costs evenly over the life of the loan; guard against harmful repayment requirements or collections practices; require concise disclosure that reflects a loan’s costs; and limit the maximum allowable charges for small-dollar loans that serve borrowers with low credit ratings.
New payday loan regulation could be imminent at the federal level. In April, the Consumer Financial Protection Bureau released a white paper critical of payday loans and indicated that “further attention” from the agency was warranted to protect consumers.