Will Google’s decision to ban payday loan ads be the end of those loans?
- According to one study, about 42% of millennials have used an alternative financial services product.
- Almost 50% of millennials couldn’t find $ 2,000 for an unexpected bill the following month.
- Federal regulators are expected to announce more rules on alternative lending products in June.
Google grabbed the headlines by announcing a ban on payday loan ads from July 13.
Quick fix loans charging triple-digit rates seem to be viewed by Google and others with the same social stigma as other dangerous products banned from advertising, such as cocaine, crystal meth, and cigarettes.
So, can the payday loan see any kind of redemption? Not likely anytime soon.
In June, the Consumer Financial Protection Bureau is expected to roll out new federal rules to tackle blatant practices involving short-term lending. After regulators hold a three-month comment period, the landscape may change. A few think that a new alternative loan could come up.
The administration of President Barack Obama has targeted payday loans, among other things, in its regulatory agenda.
The Consumer Financial Protection Bureau will hold a field hearing on small dollar loans on June 2 in Kansas City, Mo. Small dollar loans may involve annualized interest rates in excess of 300%. The proposed rules for payday loans, auto title loans and certain installment loans are expected to be published in Kansas City.
Payday loans are one of those things that you know are not good for you, but still turn to in a traffic jam. Many consumers, including millennials, need every paycheque to cover their bills in tough economic times. And then the boss makes matters worse by reducing their hours and the pay ends up even smaller.
Or maybe a car repair or vet bill throws an adjustable wrench in the budget. More than 19 million American households use payday loans for short-term credit, according to the industry.
A payday loan is often used by someone who has run out of credit card or is at max and can’t borrow more money on plastic.
To get a payday loan, you often write a post-dated check for the amount you want to borrow, say $ 300 plus a $ 40 fee. The check is made payable to the lender. Or you can allow the lender to debit your account on a fixed date. The loan term can often be 14 days.
When this time is up, the lender must get all the money back – the amount you borrowed plus fees. Finance charges and fees will increase if you cannot repay the loan and fees in full.
Almost 50% of millennials don’t think they could shell out $ 2,000 if an unforeseen need arises in the next month.
Millennials are heavy users of alternative financial services, such as payday loans and pawn shops, according to a study by the Global Financial Literacy Center at George Washington University with support from PwC.
In the past five years, 42% of millennials have used an alternative financial product, according to the Millennials & Financial Literacy report.
Payday lenders say the need is there and have criticized CFPB’s decision to regulate what some call “fringe financial services”.
Jamie Fulmer, senior vice president of public affairs at Advance America, called the initial plan CFPB rolled out in March 2015 as “a drastic proposal that will lead to the elimination of the industry.”
Fulmer argues that no alternative to traditional payday loans exists and likely won’t exist because banks are pushing too much on overdraft fees to want to create another kind of product. (The CFPB is considering new rules for overdraft fees, as well as payday loans.)
Advance America, which has 149 stores in Michigan, says many consumers have been burned by hidden fees at banks and prefer non-bank lenders.
Tony Collins, 48, said he no longer had a credit card. So he took out a $ 200 payday loan in mid-May to cover a utility bill.
“I don’t do credit cards. They’re predators. They’re much worse than that,” said Collins, who lives in Oak Park and works for a steel company.
“After the way the banks made us seven years ago, I don’t trust them anymore,” he said.
Collins was scheduled to work 72 hours this week, so making money isn’t a problem at the moment. But his bills are higher – money was needed for a stepson’s high school graduation and prom, car repair, higher health insurance costs at work .
Collins paid $ 29 to borrow $ 200 and he paid it off within a week. It was his first time taking out a payday loan, he said. Many payday loan stores dot malls, he said, as many people with much lower incomes have a harder time paying their bills.
Is there a way to prevent consumers from falling into the debt trap if they can’t pay off the payday loan with the very next paycheck? Maybe a happy medium where some short term loan options charge a lot less than traditional payday lenders?
“Millions of people are looking for a small loan to help pay their bills,” said Nick Bourke, director of the small loan project for The Pew Charitable Trusts.
Payday Loan Debt Trap Hits Consumers
He wants to see the federal consumer watchdog adapt a proposal that the payment on alternative loans cannot exceed 5% of a borrower’s gross monthly income. The loan would be repaid over a few months, not on the next paycheck.
Bourke said the typical payday loan borrower has a bank account and a paycheck, possibly from a factory or retail job. And the average consumer can earn $ 30,000, or about $ 15 an hour.
Some have problems because their income increases by 25% or more each month due to the working hours.
We’re hearing more rumors that the big regional banks might offer alternatives, according to reports from the American Banker. Some say that a new lower cost installment loan could be charged up to six times cheaper than some payday loans.
Any new product would depend on the rules proposed by the CFPB.
Tom Feltner, director of financial services for the Consumer Federation of America, wants the CFPB to require short-term lenders to assess a borrower’s income – and expenses – when granting a payday loan .
Feltner said more stringent underwriting is needed because some consumers won’t be able to pay off a payday loan anyway, as regular bills already take a large chunk of their paycheck.
Any additional issues can lead to a tight budget mismatch.
The high cost of payday loans can include bank penalties
Many states have placed limits on fees. A payday loan storefront in Michigan can charge $ 65 for a $ 500 loan over two weeks.
Or a customer who borrows $ 100 from a Michigan storefront will be charged up to $ 15 for a two-week loan (the payday lender may allow a shorter or longer period – up to 31 days). The customer writes a check for $ 115 and immediately receives $ 100 in cash. But the annualized percentage rate would approach 390% for a two-week loan with a $ 15 fee. In Michigan, the payday lender may charge an additional database verification fee of 45 cents per transaction.
The costs add up, as many loans are not paid off in two weeks and more loans are taken out. The average borrower can be in debt for five months. Some consumers may pay $ 700 in fees over time on what starts out as a $ 500 payday loan.
As the discussion of payday loans continues, it is clear that no easy solutions will emerge for those with big bills, small paychecks, and no savings.
Contact Susan Tompor: [email protected] or 313-222-8876. Follow her on Twitter @Tompor.