Payday loans – the “lifelines” that drown you in debt – are on the decline.
Fines and regulatory control over high rates and deceptive practices have shut down payday loan stores across the country in recent years, a trend limited by a proposal last summer from the Consumer Financial Protection Bureau to limit short-term loans.
Consumer spending on payday loans, both in-store and online, has fallen by a third since 2012 to $ 6.1 billion, according to the nonprofit Center for Financial Services Innovation. Thousands of outlets have closed. In Missouri alone, there were about 173 fewer active licenses for payday lenders last year compared to 2014.
In response, lenders have a new offer that keeps them in business and regulators at bay – payday loans.
Payday loans work like traditional payday loans (i.e. you don’t need credit, just income and a bank account, with the money returned almost instantly) , but they are repaid in installments rather than in a single installment. The average annual percentage interest rate is also generally lower, 268% versus 400%, according to a CFPB study.
Spending on payday loans doubled between 2009 and 2016 to reach $ 6.2 billion, according to the CFSI report.
Installment loans are not the solution
Payday loans are quick and convenient when you’re in a rush, but they’re still not a good idea. Here’s why:
Price takes precedence over time: Borrowers end up paying more interest than they would with a shorter loan at a higher APR.
A $ 1,000 one-year installment loan at 268% APR would incur interest of $ 1,942. A 400% APR payday loan for the same amount would cost around $ 150 in fees if paid off in two weeks.
“While each payment can be affordable, if it lasts for years and years, the borrower could end up paying a lot more than what they borrowed,” said Eva Wolkowitz, director of the Center for Financial Services Innovation.
You are in the hole much longer: Payday loans are often structured so that the upfront payments only cover the interest charges, not the principal.
“The longer the loan, the more you only pay upfront interest,” said Jeff Zhou, co-founder of Fig Loans, a Houston-based startup that offers alternatives to payday loans.
The additional modules are added: In addition to high interest rates, lenders may charge origination fees and other fees that increase the APR. Many also sell optional credit insurance – not included in the APR – which can inflate the cost of the loan. Lenders market this insurance as a way to cover your debts in the event of unemployment, illness, or death. But the payment goes to the lender, not the borrower.
According to the CFPB, about 38% of all installment borrowers default.
Americans still want a little credit
The demand for payday loans in any form is not going to go away any time soon. According to The Pew Charitable Trusts, twelve million Americans use payday loans each year, usually to cover expenses such as rent, utilities, or groceries.
“The initial two-week loan arose out of customer demand for the product. Likewise, in many cases, clients apply for installment loans, ”Charles Halloran, chief operating officer of the Community Financial Services Association of America, a group specializing in payday loans, said in an email. .
Income growth is slow, expenses are rising and more Americans are experiencing irregular cash flow, said Lisa Servon, professor of city and regional planning at the University of Pennsylvania and author of “The Unbanking of America “.
“It’s a perfect storm that’s very good for expensive short-term creditors, not so much for the average American worker,” she said.
What is the alternative?
While Americans want small loans, 81% said they would rather take a similar loan from a bank or credit union at lower rates, according to recent Pew surveys..
Banks are waiting for the CFPB to finalize its proposed rule for payday loans before entering the market, according to Pew. As the fate of the CFPB remains uncertain under the Trump administration, banks may not be offering cheaper payday loans any time soon.
In the meantime, if you need quick cash, try a credit union. Many offer alternative payday loans capped at 28% APR to members. Community nonprofits also provide low interest or no interest loans for utilities, rent, or groceries.
Amrita Jayakumar is a writer at NerdWallet, a personal finance website. Email: [email protected] Twitter:@ajbombay.
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