Payday loan
[1] A 2019 study found that payday loans in the United States "increase personal bankruptcy rates by a factor of two ... by worsening the cash flow position of the household.
"[7] A second 2019 study looking at the UK found that payday loans "cause persistent increases in defaults and cause consumers to exceed their bank overdraft limits.
[citation needed] According to a 2012 study by The Pew Charitable Trusts, "Most payday loan borrowers [in the United States] are white, female, and are 25 to 44 years old.
However, after controlling for other factors, there are five groups that have higher odds of having used a payday loan: those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced."
[10] This reinforces the findings of the U.S. Federal Deposit Insurance Corporation (FDIC) study from 2011 which found black and Hispanic families, recent immigrants, and single parents were more likely to use payday loans.
Pew's demographic analysis was based on a random digit dialing survey of 33,576 people, including 1,855 payday loan borrowers.
We need the government to take urgent action, not only to rein in rip-off lenders, but also to tackle the cost of living crisis and cuts to social protection that are driving people towards the loan sharks in the first place.
"[17] The likelihood that a family will use a payday loan increases if they are unbanked or underbanked, or lack access to a traditional deposit bank account.
The summary notes that while it is difficult to quantify the impact on specific consumers, there are external parties who are clearly affected by the decision of a borrower to get a payday loan.
Most directly impacted are the holders of other low interest debt from the same borrower, which now is less likely to be paid off since the limited income is first used to pay the fee associated with the payday loan.
The external costs of this product can be expanded to include the businesses that are not patronized by the cash-strapped payday customer to the children and family who are left with fewer resources than before the loan.
The external costs alone, forced on people given no choice in the matter, may be enough justification for stronger regulation even assuming that the borrower him or herself understood the full implications of the decision to seek a payday loan.
The payday lending industry argues that conventional interest rates for lower dollar amounts and shorter terms would not be profitable.
As a result, most payday lenders charge the maximum amount allowed by law, which can be as high as 400% annual percentage rate (APR).
First, the history of borrowers turning to illegal or dangerous sources of credit seems to have little basis in fact according to Robert Mayer's 2012 "Loan Sharks, Interest-Rate Caps, and Deregulation".
In addition, there appears to be no evidence of unmet demand for small dollar credit in states which prohibit or strictly limit payday lending.
[50] A staff report released by the Federal Reserve Bank of New York concluded that payday loans should not be categorized as "predatory" since they may improve household welfare.
[51] "Defining and Detecting Predatory Lending" reports "if payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation may lower it."
"[54] The report was reinforced by a Federal Reserve Board (FRB) 2014 study which found that while bankruptcies did double among users of payday loans, the increase was too small to be considered significant.
[55][56] The same FRB researchers found that payday usage had no positive or negative impact on household welfare as measured by credit score changes over time.
Moreover, Morse's study found that fewer people in areas served by payday lenders were treated for drug and alcohol addiction.
Payday lenders who provided a loan falling within the definition of a small amount credit contract (SACC), defined as a contract provided by a non authorised-deposit taking institution for less than $2,000 for a term between 16 days and 1 year,[60] are permitted to charge a 20% establishment fee in addition to monthly (or part thereof) fee of 4% (effective 48% p.a.).
Unlike other jurisdictions Australian payday lenders providing SACC or MACC products are not required to display their fees as an effective annual interest rate percentage.
In 2014 several firms were reprimanded and required to pay compensation for illegal practices; Wonga.com for using letters untruthfully purporting to be from solicitors to demand payment—a formal police investigation for fraud was being considered in 2014[67]—and Cash Genie, owned by multinational EZCorp, for a string of problems with the way it had imposed charges and collected money from borrowers who were in arrears.
[74] The CFPB has issued several enforcement actions against payday lenders for reasons such as violating the prohibition on lending to military members and aggressive collection tactics.
[78][79] Payday lenders have made effective use of the sovereign status of Native American reservations, often forming partnerships with members of a tribe to offer loans over the Internet which evade state law.
The lenders may list a different set of alternatives (with costs expressed as APRs for two-week terms, even though these alternatives do not compound their interest or have longer terms):[96] A minority of mainstream banks and TxtLoan companies lending short-term credit over mobile phone text messaging offer virtual credit advances for customers whose paychecks or other funds are deposited electronically into their accounts.
Wells Fargo currently offers its version of a payday loan, called "Direct Deposit Advance", which charges 120% APR.
Similarly, the BBC reported in 2010 that controversial TxtLoan charges 10% for seven-days advance which is available for approved customers instantly over a text message.
[101] Support and criticism quickly followed; opponents of postal banking argued that as payday lenders would be forced out of business due to competition.
