Reviews | Think there’s no good alternative to payday loans? Think again.

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Every week, In Theory takes a big idea in the news and explores it from different angles. This week we are talking about payday loans. Need a primer? Catch up here.

Mike Calhoun is president of the Center for Responsible Lending.

The rule proposed by the Consumer Financial Protection Bureau Requiring payday and auto title lenders to assess the repayment capacity of borrowers will, by all projections, reduce the number of such loans made. The question often comes up: what will consumers do instead who might have taken out a payday or car title loan?

A review of the credit market for households with lower credit scores and the experience of states that have looked into payday loans show that many alternatives are available. They are all much better than the long series of repeated high-cost loans that trap payday borrowers in unmanageable and ultimately devastating debt.

Payday loans do not help the poor. Here’s what might.

Subprime credit cards, even with 36% APR interest rates, cost a tenth of the price of payday loans. After a temporary contraction in this market following the financial crisis, new subprime credit card accounts have grown every year since 2009. They surged in 2015, with over 10 million new cards issued to subprime borrowers, up 25% from the previous year. In total, subprime consumers have 62 million credit card accounts.

Traditional consumer credit companies market installment loans to subprime credit households. They offer more credit than payday lenders and their volumes increase when payday lenders don’t squeeze them out. Data from publicly traded lenders shows they have made $7 billion on these loans in 2013, and private lenders made billions more.

Besides, 700 federal credit unions Participate in the National Credit Union Administration’s “Alternative Payday Loans” program, which provides loans of up to $1,000 that last up to six months. Banks and credit unions are also behind 3.8 million unsecured installment loans to unpreferred consumers (credit scores below 660) in 2015. Importantly, payday loan borrowers are not among the country’s “unbanked” consumers; lenders require that they have a checking account from which the lender can extract payment.

In extreme circumstances, even pawnbrokers are better than payday loans. They are less expensive and, unlike payday loans, there is an exit strategy if the borrower cannot repay: the lender keeps the pawned item and the borrower walks away, owing nothing more. Although families can give up the pawned item, they are not trapped in a series of 400% interest payday loans that can lead to far worse losses – abusive debt collection tactics, loss of a car or filing for bankruptcy, to name a few. There is more than 11,000 pawn shop windows nationally with more than 30 million customers.

Finally, utilities and other businesses often offer affordable services payment plans to those who find it difficult to follow. Indeed, payday borrowers frequently turn to these and other alternatives to ultimately repay their payday loans.

When evaluating these alternatives, it’s important to keep in mind that most payday loans don’t offer new credit; they simply return previous payday loans. More than 4 out of 5 payday loans are taken out in the same month as the previous unaffordable personal loan. Payday lenders have the right to seize the borrower’s bank account on payday, so they get their money, but often leave the borrower without enough money to pay for other essential expenses. The lender then makes another payday loan to cover these expenses, and the cycle of debt continues. In other words, payday loans generate their own demand; the business model is built on creating a debt trap, not meeting credit needs.

We can only save the economy if we fix our addiction to debt

More than 90 million Americans live in states without payday loans, and these consumers are served by these and other alternatives. And that has long been true across the country, because payday loans didn’t exist in any state until these lenders began getting special exemptions from state usury laws 20 years ago. . They did this on the assumption that their high rates were for a single, short-term loan to deal with a single emergency — not the long-term debt traps that they actually are.

The critical issue with the CFPB’s proposed rule is not where borrowers will go; as stated above, there are many alternatives. Rather, the central question is whether the rule will be tough enough to force payday lenders to stop their abusive practices and start making loans that borrowers can afford. The proposal takes the right approach with its common sense principle of “repayability”, but significant gaps need to be filled to ensure the rule fulfills the mandate of the CFPB Congress to ensure that financial practices do not inflict of substantial harm.

Mehrsa Baradaran: Payday loans don’t help the poor. Here’s what might.

Tim Worstall: We can’t get rid of payday loans just because we don’t like them

Nathan Fiala: The problem is bigger than payday loans

Valerie R. Wilson: Do you want to eliminate payday loans? Raise the minimum wage.

About Judith J. George

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