Should the CFPB leave payday loan customers alone?

Payday loans are short-term – and typically fairly low amount – loans that are designed to provide individuals with necessary funds in between paychecks. They are provided in the United States and are also found regularly in the UK and Canada. Though certain states provide general regulations regarding the exact interest rates that can be charged, most short term paycheck advances cost on average of $15-30/ per $100 borrowed. This equates to an annualized interest rates of 391% and up. States where these regulations are not enforced, privately owned payday loan organizations are able to set their own interest rate. This seems expensive, but if you need the additional few hundred to take care of an emergency where not making a payment can significantly cost more, then it makes sense.

These are the facts and statistics behind the basic concept of a payday loan, but they are not the reason that payday loans have come under fire recently from public service organizations and other prominent figures. No, the discord regarding payday loans instead has more to do with the target market for payday loans and the typical nature in which they are paid back.

The CFPB advocates that payday loans are typically targeted at low-income individuals who are otherwise unable to seek necessary funds from any other source. Studies suggest that these loans are typically used to cover normal monthly expenses as opposed to unexpected sudden fiscal emergencies and that it can often take months for the average loan recipient to pay off their loan. During this time, they may also acquire additional payday loans to help cover payments for the other.

Because of these occasions in which payday loans throw borrower’s into extreme cycles of high-interest debts, critics of the system believe that they are a toxic idea that do more harm than good and should be eliminated outright.

However, the lending system is not without its advocates. Supporters of the payday loans industry – such as Forbes writer Norbert Michel – argue that any who call for the removal of payday loan organizations must first start their analysis by considering that the fundamental reason that many people turn to payday loans in the first place is because they are presented with no other real alternative. This checks out. Look at the collection activity on consumers reports:

Due to the relatively small amount typically offered by the loans – often well below $1000 on average – they are not the kind of advances that any other legal loan source such as a financial institution would typically grant. However, again due to the fact that many of the loan’s recipients are in a low-income bracket, these small loans are often still just as necessary as larger loans offered elsewhere.

Furthermore, the practices under which many payday loan organizations operate are not only in compliance with state and federal laws, but compare favorably to the terms offered by larger lenders. The APR available at these organizations is in line with industry standards outside of a few unregulated markets, and the common practice of loan recipients needing to roll over a loan to additional weeks is conceptually and statistically similar to instances of large loan refinancing.

Perhaps the most substantial argument in favor of the continued existence of payday loan organizations, however, involves their simple terms. These small advances boil the very concept of what a loan is, down to its very essence regarding interest rates, eligibility and repayment terms, therefore suggesting that many who acquire a payday loan are not unaware of what is expected – and what can happen – after the loan is acquired. The fact that over 12 million people per year acquire payday loans and that the number of official complaints regarding the transaction represents under a tenth of those borrowers suggests that many of these lenders are operating within their agreed upon terms.

The argument surrounding the future of the payday loan industry will rage on, but the consumer financial protection bureau will no doubt consider the strong arguments of payday loans proponents before making their final decision regarding consumer rights.

The CFPB was started as part of President Obama’s administration effort to regulate lending after the 2008 housing market financial collapse. The department has alot of power, more than many government officials say they should have. They have been dabbling into finance across the country and in many different verticals including mortgages, payday, credit cards, etc. Many business officials advocate that with the watchful eye and prying means of the CFPB, it hurts consumer lending across the board. With interest rates higher on some loans than others, alot of folks just do not have the same means for acquiring lending options as others. There should be equal lending for all, but we all know, this just is not possible. As history would have it, its up to the market and the businesses in that market to find an equal medium.

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