Payday loans offer borrowers short-term money at a high annual interest rate. In 2017, the Consumer Financial Protection Bureau (CFPB) under the Obama administration enacted the Payday Lending Rule. The rule—poised to take effect in August of 2019—would require borrowers to demonstrate their ability to repay these types of loans beyond showing pay stubs and bank statements. The Trump administration, however, has pushed back against the rule. Kathy Kraninger, the new CFPB director, recently withdrew the requirement and delayed the remainder of the rule until 2020. Payday lenders have celebrated the action taken by the new administration, while Democrats and consumer advocates have condemned it.
Opposition
Of the 12 million people who take out payday loans, many are from low income areas with high minority populations. Consumer advocates point to studies that show payday loans trap borrowers in cycles of debt, making them detrimental to the well-being of those who use them. According to a 2014 report by the CFPB, more than 80% of payday loans aren’t paid back on time and are renewed. This creates an accumulation of fees and interest rates that can reach 300%. When the Payday Lending Rule was proposed in 2017, Republicans opposed it on the grounds that it would kill the $38.5 billion industry. The CFPB has estimated that nine out of ten payday loan businesses would shut down if borrowers were forced to prove their ability to repay the loans.
Banks and Credit Unions
A proposal from the Pew Charitable Trusts has pushed for traditional banks and credit unions to provide small, short-term loans at significantly lower rates than payday loans. Although the CFPB during the Obama administration issued regulation in the fall of 2017 to allow for this, it remains to be seen if the option will become widely available. U.S. Bank did begin offering short-term loans to its customers in 2018. With their Simple Loans, borrowers can get from $100-$1,000, and pay it back in three payments over three months. U.S. Bank charges a $12 fee for every $100 that is borrowed, as opposed to payday loans which charge $15 on average.
P2P Lending Option
The peer-to-peer lending marketplace offers an alternative to customary payday loans. SoLo Funds is a mobile lending exchange that connects lenders and borrowers for loans less than $1,000. The 30 day loans are interest free and borrowers are paid via ACH transfers. The company uses a combination of cash flow and social data to determine a borrower’s ability to repay the loan in a timely manner. The transaction ends with funds being withdrawn from the recipient’s account and returned to the lender. If a borrower does not pay the lender back, a lender can give the borrower more time or send them to collections. Although SoLo claims that the default rate on their loans is 3% (versus 6% on payday loans), participating lenders claim that it is higher. Consumer reviews on the P2P lending option are mixed. In addition to SoLo, there are two other companies in the space – SoFi and Prosper. If traditional payday lenders eventually face some form of regulation that forces them to verify borrowers in a more stringent manner, it stands to reason that P2P short-term loan options would benefit.
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