Surveys Say: Consumers Want Small-Dollar Loans (Dec. 9, 2013)
Last week was a busy one for the payday loan industry. On Tuesday, New York’s Department of Financial Services (DFS) sent subpoenas to 16 online “lead generation” firms suspected of deceptive or misleading marketing of illegal, online payday loans in New York. On Wednesday, two new reports were released examining small-dollar lending. The first, from the Center for Financial Services Innovation (CFSI), explains why consumers use small-dollar loans and the second, commissioned by the trade organization Community Financial Services Association of America (CFSA), suggests small-dollar loan customers are satisfied with their experiences of the products.
A press release from DFS said the subpoenas are part of an extensive and ongoing investigation into payday loans. DFS suspects that the 16 firms, which don’t make payday loans themselves, are placing consumers at risk of abuse by collecting and selling their personal information to illegal online payday lenders and other companies, including scam artists, in violation of New York State law.
While the payday lending industry continues to find itself in the regulatory crosshairs, research shows that consumers need and want access to short-term credit. For example, CFSI’s study, supported by funding from the Ford Foundation, identifies four primary consumer scenarios that lead an estimated 15 million U.S. consumers to access small-dollar credit (SDC) products—such as payday loans, pawn loans, auto title loans and deposit advance loans. “Know Your Borrower: The Four Need Cases of Small-Dollar Credit Consumers” found that consumers access SDC products for: unexpected expenses, misaligned cash flow, exceeding income or planned purchases. These need cases were determined through analysis of a survey of more than 1,100 SDC borrowers and 31 in-depth interviews with SDC customers. They provide a new framework for exploring the challenge of when and how to responsibly extend small-dollar credit, according to CFSI.
The CFSA study, conducted by Harris Interactive, found that more than nine in 10 payday loan borrowers report their experience with the terms (96 percent) and cost (92 percent) of their payday loans was as expected or better than expected, while more than four in five borrowers (84 percent) say it was very easy or somewhat easy to repay their loans. The research is based on telephone surveys among 1,004 respondents ages 18 and above, who are customers of storefront companies within the CFSA, and took out a loan which they repaid in the summer of 2013. The results also suggest that loan customers carefully weighed the risks and benefits before taking out a loan (93 percent), and value having the option to take a payday loan (95 percent). Borrowers almost unanimously agree that it should be their choice whether or not to use payday lending, not the government’s choice (95 percent).