These days, payday lending is not a subject that lends itself to much in the way of rational discourse. It does much better at attracting passionate disagreement among partisans.
Opponents of the practice note that, in its most vicious form, payday lending is an expensive predatory scourge on the class of borrowers it attracts, drawing them into a confusing and protracted cycle of debt. Proponents counter that what, from the outside, looks like terrible abuse is actually — for many consumers — the thin red line that stands between them and some really objectively terrible things, like repossession, eviction or the tender mercies of a collections agency.
And while the points of friction are myriad — and have been documented, in all their colorful wonder, across the pages of PYMNTS in 2016 — there seems to be one thing that everyone involved in the debate agrees on, and that is The Pew Charitable Trusts' numbers.
While the representatives of each side will question almost any number set — and usually the moral decency, patriotism and intelligence of the people who gathered them — the figures from The Pew Charitable Trusts' small-dollar loans project are generally considered the gold standard in the debate.
So, PYMNTS reached out to Pew and the director of its small-dollar loans project, Nick Bourke, to get their perspective on the payday loan problem, as the ecosystem eagerly awaits the coming round of CFPB draft rules on the subject.
And what we learned about Pew's perspective was a bit surprising.
“Most people in the payday loan debate continue to ask the wrong question," Bourke told PYMNTS in an interview. "They keep asking: Are payday loans good or bad? Should we have them or not?"
The problem with framing the debate that way, Bourke says, is that it mostly misses the point. Payday loans, because of who they serve and what they do, aren't going anywhere without disastrous consequences.
"The better question is: How do we make small loans available to people in a way that is safer and costs less? Research answered that question. You give them more time to pay, with better guidelines on how big a monthly payment can be and how long a loan can last."
What else did we learn from Bourke?
The Average Payday Loan Customer Is "Pretty Mainstream"
Payday loans — despite the press they get as a fringe financial service — aren't really for fringe customers, according to Pew's research, or at least not fringe in a way most people would picture.
Most payday loan borrowers are white, female and single parents, Bourke noted.
“The payday borrower is an incredibly mainstream consumer. They make at least $30,000 a year, which adds up to $15 an hour. They have a checking account, because you have to have a checking account to get a payday loan. And in seven out of 10 cases, they are using it for paying a bill.”
Though typically written about as "outside the credit system," that is also a bit off. Most payday loan borrowers have credit cards that are maxed out; paying off credit card balances is actually a fairly common use case for short-term loans.
“These products are pitched at consumers that are lower income but not bottom of the barrel. More importantly, that income then determines who gets a payday loan, though. It's someone who lives paycheck to paycheck and has trouble paying bills.”
The Typical Trouble With Payday Lending
Payday lending is expensive, notes Bourke, but the cost isn't really the main structural problem. It's the extremely short duration that tends to cause an extremely fee-intensive set of problems for the average user.
“The typical, conventional payday loan is due back in two weeks in full. Average size is about $375, with a $55 fee on top of that. So, about $430 is due back.”
When most people think about the cost of the loan, they would name $55 as the price. But, Bourke says, that is not how it works out 80 percent of the time.
“On average, $430 represents 36 percent of the typical borrower's paycheck before taxes. So, when that loan comes due, the already struggling borrower loses a big chunk of their income. The payday lender has tremendous leverage over the borrower because they can reach into the borrower's checking account and get paid first.”
And this, according to Pew's data, is where the trouble kicks in.
“The borrower has trouble paying other bills, like rent or mortgage, and the borrower ends up taking another payday loan to make ends meet. That’s why the data is very consistent that the typical borrower renews or reborrows payday loans almost immediately after paying a previous payday loan, and they are in debt, on average, for half the year before they end up getting out of it. Over the course of that experience, they paid $520 on average, which is much more than the $55 price tag that gets quoted.”
The Solution Set — If One Is Possible At All
The problem with the situation noted above, according to Bourke, is mostly one that centers on consumer knowledge. The borrower thinks the loan costs $55, when, in fact, it will cost them over $500. And that the CFPB can fix — narrowly.
“Pay and auto title loans are going to stay on the market, and the CFPB has no ability to regulate pricing. So, we’re still going to see, even with the CFPB rules, millions of people using payday and auto title loans at an APR of 400 percent or higher. The main impact of the CFPB rule is the typical borrower will get more time to repay the loan, but they aren’t necessarily going to save money."
Those looking to debate the merits of abolition aren't being realistic, according to Pew, and are failing to ask the right question about the coming draft regulations. The first right question is about reasonable limits.
“How well does this stop harmful practices in the market?”
The second question — and the much more complicated one — is whether the CFPB's rule will offer guidance that allows for the creation of any reasonable competition to the short-term lending market as currently constituted.
“Does the CFPB rule provide clear product safety standards that banks and credit unions can use to offer competing products?” Bourke asked.
And that second question, Bourke said, is the harder one. Banks and credit unions have been warned off high-risk, non-secured debt of the kind on display with short-term lending by both the FDIC and the Office of the Comptroller, and trying to bring them into the market isn't straightforward.
“The CFPB and all the banking regulators agree that a short-term balloon payment loan is a dangerous proposition. That is why the OCC and the FDIC made banks stop offering deposit advance products, because they were basically just payday loans due in full in two weeks."
But, Bourke notes, the CFPB rule could do more here if well-formed.
"What nobody knows yet is what a good, small installment loan should look like under federal regulations, and that is why the CFPB rules matters so much. The CFPB has an opportunity to define what a safe, affordable, small installment loan looks like. And if they take that opportunity and define it, you’ll see banks start to offer those to consumers at scale for six to eight times less than what is currently on the market.”
That last bit — to us — sounds optimistic. The CFPB would have to offer a definition that would make it more than merely plausible to offer short-term, small-dollar loans to high-risk consumers but actually profitable as well. That seems like a very steep mountain to climb.
But broadly, Nick Bourke made a strong point. Research shows that consumers want these products to exist and would prefer regulation that made the process at least more transparent (though less costly is also deeply preferred).
“It boils down to what one’s objectives are.”