Payday lending is a practice where lenders make small loans that are typically due in two weeks’ time, at the next payday. Payday loans often have expensive fees in addition to very high annual percentage rates — sometimes equivalent to 400% APR or higher. Borrowers also typically must secure the loan by providing the lender with access to their checking account or by writing a check for the full balance, which the lender can decide to deposit when the loan is due.
The mission of the Hebrew Free Loan Society is to help people achieve financial stability and self-sufficiency. We do this by offering interest-free loans to people who need credit but cannot qualify for affordable rates. Payday lenders also provide credit to low-income borrowers, but they charge sky-high rates that can trap people in unsustainable and financially ruinous debt. By opposing predatory payday lenders, HFLS protects the people we were created to help.
Payday loans take a significant financial toll on people who are already in a financially precarious state. Borrowers often take these loans to avoid leaning on friends or family in a time of need, but research shows that payday loan borrowers often need to seek out this kind of help when they’re trying to pay back their loan. A payday loan must be paid back all at once in a “balloon payment,” and many people are not able to pay off the entire loan by their next payday. When this happens, a borrower can pay the minimum payment – the interest – and roll over the principle of the loan until their next payday. Thus, the lender gets paid but the borrower is has not paid down any of the original loan. A recent study found that the average payday lender rolls over his or her loan 8 times, paying around $520 in interest on a loan of just $375.
In states where payday lending is permitted, storefronts are often located in high-poverty areas where people are less likely to have access to traditional finance services and are in greater need of short-term financing. Payday-lending storefronts are usually targeted toward the most vulnerable members of society who are facing challenging financial circumstance. Single mothers and minorities are disproportionately represented among consumers of payday loans.
New York and 14 other states prevent payday lending by capping interest rates on small-dollar consumer loans. The interest cap in New York is 25% APR, and in some other states it can be as high as 36%. These caps effectively eliminate predatory payday loans from states where they are in force, since the business model for unsafe payday loans requires interest rates of 300% or higher. In states without an interest rate cap, laws relating to payday loans vary broadly – some states have minimal regulations, while others use various methods to rein in the worst abuses. In June, the Consumer Finance Protection Bureau (CFPB), the government agency in charge of protecting consumers from dangerous financial products, issued a proposal for regulations that will provide minimum standards for payday lending across the country.
It is essential for consumers to be able to access small-dollar credit to be financially successful. There currently aren’t enough options for small-dollar credit that are affordable, transparent, priced fairly, and structured so that borrowers can repay without falling into a cycle of debt. Some alternatives are low-interest cash advances or loans from an employer, payday alternative loans from credit unions, and some online lending platforms like QCash. Interest-free loans from the Hebrew Free Loan Society provide another excellent alternative to predatory payday lending for New York City-area residents.
The CFPB cannot change the rule until it receives public comment, and it has set May 15th as the deadline. This is our window to demonstrate that it is not only the payday lending industry lobbyists who are paying attention, but rather that ordinary Americans care about this issue.
The Center for Responsible Lending (CRL) has prepared a brief analysis of the rule change.