By Alexandre Taylor
Payday loans have been around since the early twentieth century. These loans, ranging from $50 to $500, are typically extended to individuals who “need some extra cash before their next payday” at APRs ranging from 300-500%. Increasingly common in the 1980s due to banking deregulation, Pew Research estimates that 12 million Americans now use payday loans annually. The initial loans, rolled over and combined with additional bridge loans (64% of debtors renew their loans with additional fees), lead to a 20% default rate.
Obama-era policies, specifically through the creation of the Consumer Financial Protection Bureau (CFPB), sought to end short-term, high APR loans by requiring that lenders provide evidence that borrowers can pay back their debt. In February of 2019 Fox News reported that, “rescinding the payday loan rule is a win for consumers, allowing individuals - and not Washington bureaucrats - to decide what is best for themselves.” The conservative argument is that payday loans provide essential lines of credit to low-income borrowers in times of need, as many do not have access to the required financial resources. However, the reality is that individuals earning between $40,000 and $100,000 per annum are more likely to engage in payday borrowing than those earning between $15,000 and $40,000. Additionally, most borrowers use payday loans to cover ordinary expenses over an average of five months and use the loans in recurring cycles.
The argument that the payday loan business contributes to the American economy is also inaccurate – the firms do far more harm than good. Americans lose $5 billion every year in payday loan fees and interest. The Insight Center for Community Economic Development estimates that payday loans cost the US economy $1 billion dollars in lost consumer spending every year. The CFPB’s policies are estimated to reduce payday loan volume by roughly 60%.
Indeed, it appears that the Trump administration’s loyalties lie with a loan system which exploits the average American. In fact, there is no need for high-APR payday loans to even exist‒they provide no benefit to consumers that larger institutions, such as banks, cannot extend to consumers. An alternative to predatory, high-APR payday loans was announced by Bank of America on October 8. Under its new program, Bank of America customers will be able to loan up to $500 for a flat $5 fee over three months–an APR of 4%. In this case, conservatives should rejoice. The loan market has evolved to protect consumers in spite of federal anti-consumer deregulation.