Nationwide, 12 million people make use of payday loans each year, turning to them for a desperate short-term cash infusion, and on average they spend $520 in interest to borrow $375, according to a report from The Pew Charitable Trusts.
Why would someone agree to this kind of deal? Pew’s report includes survey findings from payday borrowers. Eighty-one percent of borrowers say that without payday loans, they would have to cut back on food and clothing expenses for their families. “Majorities also would delay paying bills, borrow from family or friends, or sell or pawn possessions,” Pew reports.
But the best legislative efforts to rewire the predatory business model that payday lenders use at present still leave borrowers deep underwater on cash advances between paychecks, according to Pew’s case study of one state’s actions to curb the industry’s abusive practices without running lenders out of business entirely. The key to changing things, according to Pew, is to stop lenders from requiring lump-sum repayment and shift instead to an installment-based repayment plan for the short-term advances. Colorado took that step in 2010, and payday borrowers in the state “now pay an average of 4 percent of their paychecks to service the loans, compared with 36 percent under a conventional lump-sum payday loan model.”
Yet the loans are still a terrible deal. With interest and fees, Coloradans are paying a 129 percent annual rate on them. Spreading that pain around the calendar has stopped the loans from leading to permanent debtor status and massive wage garnishment, Pew’s report argues. The 129 percent annual rate in Colorado is a substantial improvement compared to the national average of 339 percent annual interest that was found by Consumer Financial Protection Bureau researchers, but it is still a giveaway for the borrower. Pew’s endorsement of Colorado’s less-bad approach to the predatory lending that millions of vulnerable Americans rely upon drew scorn from the progressive think tank Demos.
Previous research has found that payday lending siphons over $3 billion per year out of the country’s poorest communities. The industry spends some of that haul on buying legislative concessions on both the national and state level. Alabama’s repeated efforts to regulate the industry have been rebuffed by lobbyists in the past, and even a more moderate effort in the state to bring transparency to the loans is drawing pushback from the lenders.