A lot has been said and written about payday loans.
In fact, there’s been a literal deluge of data on the subject: stacks of studies, reams of regulations, a plethora of public hearings and an otherwise unending series of arguments about whether or not this form of lending is a useful and well-understood type of loan for banked, middle class people who need one — or a predatory product that traps consumers into a cycle of expensive debt.
There’s been so much said and written the PYMNTS team wrote an entire eBook primer on the subject that is worth reading for the names of the congressional subcommittee hearings alone. (“The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty” will always be our favorite.)
Pew added a few new data points to the pile in an attempt to get to the heart of what consumers — the Average Joe and the payday borrower — think about them.
You’ll need a few facts first.
Payday loans range in size from $100-$1000, though many states cap them at $500. The average amount borrowed is $395; the median is $350. They are generally the shortest of the short-term loans — as they are intended to be paid off on the borrower’s next pay date — and generally have an original term of about two weeks. Most payday loans are rolled over, however, and those consumers who do not pay them off immediately (or close to it) tend to see their loans last for 112 days, or 3-4 months.
Payday loans generally assess fees per $100 borrowed — usually ranging from $15-$30. Because borrowers on average rollover payday loans past their initial 14-day term, fees and interest can quickly outstrip the original loan amount. A borrower out the average loan of ~$375 will pay $520 in interest if they roll their loan over the standard amount of time (3-4 months). Translated annualized costs (of the type one might see on a credit card bill): the loans carry average APRs that range between 300 and 400 percent.
Payday lenders say that since the loans are designed to be two weeks long and that most people pay them off in under 60 days, annualizing the costs doesn’t make any sense other than as a way to generate a lot of bad PR. Critics of payday lending note that since payday loans are quite often rolled over and extended over a quarter of a year or more, providing consumers with a longer range picture of the fees over time is a helpful way to understand the “total cost of ownership” of those credit products.
The average borrower is neither unbanked nor financially destitute, since borrowers must have access to both a checking account and a job to even qualify for a payday loan. According to the Pew Charitable Trusts, the average borrower is a white female aged 25 to 44 with at least one child, at least one credit card account and a full-time job with a salary between $30,000 and $50,000 per year.
Most of the borrowers are also part of the 47 percent club: the 47 percent of Americans who the Federal Reserve estimates could not cobble together $400 to pay for an emergency. The most common reason borrowers take out a payday loan is to cover the essential: repairing their car so that they can get to work.
Now to the Pew study.
The General Consumer
In July of 2016, the CFPB proposed a new rule to govern payday and automobile title lending. According to Pew, the new rules “would establish a process for determining applicant’s ability to repay a loan but would not limit loan size, payment amount, cost or other terms.” Many sources have written that this new underwriting requirement, enhanced credit screening and ability to repay rules will likely shutter 80 percent of payday (and short-term) lenders.
Keep that figure in mind — it will become important later.
Perhaps not all that surprisingly, Pew’s data reflects an interest on the part of the American consumer for regulation of these products, with 70 percent saying that the industry should be more regulated.
But here’s where it starts to get wonky.
When specifically asked if it would be a good outcome if consumers were given “more time to repay their loans, but the average annual interest rate would still remain around 400 percent,” 80 percent of consumers said that would be mostly a bad outcome — as opposed to 15 percent, who said it would be mostly a good outcome. That, of course, reflects part of the CFPB’s proposal.
The survey also reported that 74 percent of Americans thought “if some payday lenders went out of business, but the remaining lenders charged less for loans” would be a mostly good outcome, as opposed to 15 percent, who said it would be a mostly bad outcome.
You almost have to wonder who the 20 percent were who thought that might be a good idea.
Consumers showed overwhelming support for lower rate loans — particularly lower rate loans offered by banks and credit unions. Seventy percent of survey respondents said they would have a more favorable view of a bank if it offered a $400, three-month loan for a $60 fee.
We should note that respondents were only able to choose between non-bank lenders charging 400 percent interest on an installment program, or bank/credit union lenders charging “six times less than payday lenders.” Respondents did not have an option to choose a non-bank lender that charged a non-triple-digit interest rate.
Seems like an odd way to phrase a question, perhaps?
Pew also asked consumers which option would be better for them. Option One: Lenders pull borrowers credit reports, estimate their expenses and then issue the loan for about $350 in fees (on a $400 loan). Option Two: Lenders review customer’s checking account histories and issue a loan for $60 in fees (on a $400 loan).
We’ll let you guess which got the most responses.
The Borrowers’ Point of View
In some ways, payday loan borrowers have similar thoughts on the institution as the rest of the nation.
About 70 percent of borrowers think more regulation is a good idea and show strong support for possible plans that involve getting a $400 loan for $60 in fees to be paid off over six months — much more than they like the idea of paying $600 in fees for a $500 loan over the course of a six-month payment period.
Who wouldn’t? But that’s not the way that the majority of borrowers use these products.
Payday borrowers also tend to think about the institution a bit differently. When they are evaluating their options — remember the circumstances: a banked consumer with an emergency — their three driving concerns are how quickly they can gain access to the money, how much the money will cost and how likely they are to be approved for the funds.
Understandably, they also view solutions where “some payday lenders went out of business, but the remaining lenders charged less for loans,” a good deal more dimly than the general population — with over 30 percent saying that would be harmful rather than helpful. Payday borrowers also showed tepid support for the stronger underwriting requirements the CFPB is considering for short term loans: 46 percent said such a change would be “not an improvement” as opposed to only 21 percent that said it would be.
So What Then …
People, it seems, like low rates on any loan — short term, long term and all of them in between.
They also like access to short-term loans that help them out in a pinch from credible suppliers of those funds. So, we can surmise that they probably wouldn’t like it if 80 percent of those lenders suddenly weren’t available to them anymore.
As for rates, lending is a risky business for any borrower, and lenders underwrite risk and price for it. Short-term lenders don’t charge high rates for love of usury — short-term lenders lend to people with less than stellar credit and a 20 percent default rate. Banks loans, by contrast, have a default rate of roughly 3 percent.
The future of the industry is still uncertain, as the CFPB’s final rule-making remains to be released.
“The CFPB rule is one where I don’t think it is well-thought-out, and it is a little offensive to the state system. My line on this rule is that it was written substantively by people who have never needed $500 to cover their costs or repair their car. So they prefer to severely limit credit opportunity for those folks and seem utterly unaware of the social consequence of that,” a regulator on a panel at IP 2017 said, noting that the industry as a whole favors regulation, but not top-down regulation that is made without regard for conditions on the ground.
Yes, even the industry would like to see clearer rules made — and for every skanky such lender, there are many, many who use software to comply with state rules to keep rates in check. But, more than clear rules, they’d prefer those rules to be based in fact, so that they can remain in business — which even this recent Pew study seems to indicate their customers would prefer as well.