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There will always be a need for small-dollar loans. But loans that trap people in debt and burden borrowers with triple-digit interest rates are simply abusive.
May 5 -
The Consumer Financial Protection Bureau's plans for revamping payday lending set off a fierce debate Thursday over whether the agency had gone too far or not far enough, proving that this is likely to be one the trickiest rulemakings the agency will ever attempt.
March 26 -
A number of companies across the U.S. are harnessing technology to solve Americans' cash flow challenges. But there is much more to be done to bring these solutions to the millions of Americans who need them.
March 26 -
The finance and technology industries should take some of the energy they've poured into mobile payments and put it toward making small-dollar loans more affordable.
February 24 -
The CFPB has a historic opportunity to fix the small-dollar loan market by emulating Colorado's reforms. That would mean requiring all payday lenders to offer affordable installment payments and cracking down on deceptive practices like loan flipping.
February 4 -
Fifth Third Bancorp and Regions Financial are the latest banks to detail the financial fallout from a regulatory crackdown on the small-dollar consumer loan product.
January 22
The Obama administration recently
With or without payday lenders, the demand for short-term credit will still exist. Moreover, illegal lenders will gleefully supply $300 short-term loans. They typically charge $60 interest for one week, not for two weeks.
The MLA effectively bans payday lending to military personnel. A two-week $300 payday loan with a 36% APR would generate $4.15 of interest income. This cost to the consumer is about equal to the average cost of an out-of-network ATM
The new regulations will extend the 36% rate cap to additional types of small-dollar loans made to military personnel, including installment loans. Unlike payday loans, installment loans are paid back in equal installments, and the amount owed decreases over time. These new regulations limiting interest rates are the latest in a long series of misguided legislation and regulations that limit or deny access to important consumer credit products.
Is a 36% annual interest rate for a small-dollar loan too high? Those who say "yes" likely have a worldview shaped by large-dollar home mortgages or auto loans. But people need to borrow money for many reasons. Millions of Americans rely on nonbank-supplied small-dollar loans to meet wide-ranging credit demands like durable goods purchases or for unexpected automobile repairs.
The National Consumer Law Center claims a 36% annual interest rate cap is validated by a "
In the Progressive Era of the early 20th century, credit reformers understood that the needs of borrowers and lenders had to be satisfied to create a sustainable market-based alternative to illegal "loan sharks." These reformers sought to pass state laws allowing licensed lenders to make small-dollar loans at rates above state-imposed interest rate ceilings, then typically 6%.
In partnership with lenders willing to risk capital by making loans repaid in equal installment payments, reformers framed the model Uniform Small Loan Law of 1916. Through rigorous studies, the reformers determined that the costs and risks of small-dollar lending merited an annual interest rate of about 36%. In 1916, $300 or less was deemed a small-dollar loan ($6,900 in 2015 dollars).
Small-dollar installment loans remain an important nonbank-supplied consumer credit product. Installment lenders carefully identify potential borrowers who will be able to repay the loan. Only about half the people seeking an installment loan get one. Those denied must find another credit source.
During a recent
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Consumer advocates, regulators, and legislators must stand courageously and do what the far-sighted reformers did 100 years ago: allow for much higher interest rates on small-dollar loans. The cost to consumers is low. A 108% APR on a $300, 12-month installment loan costs only $2.94 per week more than a similar loan at a 36% APR. Consumers should have the choice to pay this additional pittance. The trifling amount can help eliminate the loan desert.
