Living paycheck to paycheck is a scary fact of life for many Americans. Without any substantial savings, an emergency or accident can land a serious blow to a family counting on that next paycheck going towards housing and food, not something like hospital bills. Tapping into saving would be the first sensible option, but with 27% of households in the US without any amount of money saved up, these people have few choices other than a short term loan. In order to fill this void, small institutions have begun offering loans typically from two weeks to two months. This industry, known as fringe banking, has skyrocketed in popularity since the Great Recession, offering payday loans, cash checking, title loans, and similar services targeted at the lower class.
When most people need money for large personal expenses they typically approach a bank and ask for a loan. But if someone has no credit history or bad credit a bank will be wary and they most likely will be denied for a low interest loan. Here enter payday lenders. They know their customers are vulnerable and most likely have nowhere else to turn. Therefore, they are able to offer loans with exorbitant interest rates.
The people approaching these institutions most likely have very low financial literacy so they do not realize how bad of a deal they are really getting. Payday lenders take drastic steps to disguise the real conditions of their loans because they want their customers to only think about the money they are receiving, not how much it will actually cost them. Combine all these factors and you have uninformed customers taking out high interest loans from businesses who are being dishonest about the consequences. This all matters because these people have jobs and bills to pay, they are most likely very close to deep poverty and any financial misstep can be a death sentence.
The government is aware of this problem but oversight takes time and the industry is able to shift faster than the feds can regulate. Most of the fight to regulate these businesses lies with state governments while the Consumer Financial Protection Bureau (CFPB) recently gained the ability to supervises the industry on the federal level. The government should act to protect these customers from doing unfixable harm to themselves. Certain states have been fighting to limit the risk for consumers but often when regulation is put into place lenders change their product into something unregulated.
- Delaware and Rhode Island have mixing county and state regulations
What you can do as a financially literate and aware individual is petition the CFPB to begin regulating the online payday industry, they are the best government organization to deal with that. Just as importantly states without regulation for this industry need to be petitioned to cap interest rates on short term loans. Because of the history of the industry, regulation needs to be broad enough to cover any changes that they can make to their business. With stricter laws, consumers can be protected from the harm these businesses allow customers to do to themselves and prevent people from being trapped in poverty by these loans.