Payday Lending: Will Anything Better Replace It?

The practice is slowly being regulated out of existence. But it’s unclear where low-income Americans will find short-term loans instead.

F ringe financial services is the label sometimes applied to payday lending and its close cousins, like installment lending and auto-title lending-services that provide quick cash to credit-strapped borrowers. It’s a euphemism, sure, but one that seems to aptly convey the dubiousness of the activity and the location of the customer outside the mainstream of American life.

There are many parallels between the early-20th-century loan sharks and today’s payday lenders, including the fact that both sprang up at times when the income divide was growing

And yet the fringe has gotten awfully large. Payday lenders serve more than 19 million American households-nearly one in six-according to the Community Financial Services Association of America, the industry’s trade group. And even that’s only a fraction of those who could become customers any day now. The group’s CEO, Dennis Shaul, told Congress in ericans live paycheck to paycheck, without the resources to cover unexpected expenses. Or, as an online lender called Elevate Credit, which offers small loans that often have triple-digit annualized interest rates, put it in a recent financial filing, “Decades-long macroeconomic trends and the recent financial crisis have resulted in a growing ‘New Middle Class’ with little to no savings, urgent credit needs and limited options.”

Payday lending works like this: In exchange for a small loan-the average amount borrowed is about $350-a customer agrees to pay a single flat fee, typically in the vicinity of $15 per $100 borrowed. For a two-week loan, that can equate https://paydayloansohio.net/cities/apple-creek/ to an annualized rate of almost 400 percent. The entire amount-the fee plus the sum that was borrowed-is generally due all at once, at the end of the term. (Borrowers give the lender access to their bank account when they take out the loan.) But because many borrowers can’t pay it all back at once, they roll the loan into a new one, and end up in what the industry’s many critics call a debt trap, with gargantuan fees piling up. As Mehrsa Baradaran, an associate professor at the University of Georgia’s law school, puts it in her new book, How the Other Half Banks, “One of the great ironies in modern America is that the less money you have, the more you pay to use it.”

Perhaps you know all this already-certainly, an assuredly mainstream backlash has been building. Last spring, President Obama weighed in, saying, “While payday loans might seem like easy money, folks often end up trapped in a cycle of debt.” The comedian Sarah Silverman, in a Last Week Tonight With John Oliver skit, put things more directly: “If you’re considering taking out a payday loan, I’d like to tell you about a great alternative. It’s called ‘AnythingElse.’ ” Now the Consumer Financial Protection Bureau, the agency created at the urging of Senator Elizabeth Warren in the wake of the 2008 financial crisis, is trying to set new rules for short-term, small-dollar lenders. Payday lenders say the rules may put them out of business.

The stakes are very high, not just for the lenders, but for the whole “new middle class.” It seems obvious that there must be a far less expensive way of providing credit to the less creditworthy. But once you delve into the question of why rates are so high, you begin to realize that the solution isn’t obvious at all.

The typical payday-lending customer, according to the Pew Charitable Trusts, is a white woman age 25 to 44

“Say, don’t you kno w this business is a blessing to the poor?” So said Frank Jay Mackey, who was known as the king of the loan sharks in Chicago at the turn of the 20th century, according to Quick Cash, a book about the industry by Robert Mayer, a political-science professor at Loyola University Chicago. Back then the loans were illegal, because states had usury caps that prevented lending at rates much higher than single digits. Still, those illegal loans were far cheaper than today’s legal ones. “At the turn of the twentieth century, 20% a month was a scandal,” Mayer writes. “Today, the average payday loan is twice as expensive as that.”