Pew Unveils Policy Recommendations to Solve Payday Loan Problems

by Sabrina I. Pacifici on October 31, 2013

“A report released by The Pew Charitable Trusts today provides guidance for federal and state policymakers on how to make the payday loan marketplace more safe, transparent, and predictable. According to a series of studies by Pew, repayment of these short-term loans takes 36 percent of the paycheck of the average borrower, who can afford to pay only 5 percent. As a result, the typical customer has to repeatedly “re-borrow” the money every two weeks, spends five months of the year in debt, and ultimately pays $520 in fees for the original loan of $375. “Payday loans fail to work as advertised,” said Nick Bourke, who directs Pew’s payday lending research. “They far exceed borrowers’ ability to repay, and—by a 3-to-1 margin—payday loan users say they want more regulation of the product. All small loans must have affordable payments. Payday loans do not. Pew’s research demonstrates effective ways to address this problem.” Payday Lending in America: Policy Solutions is the third report in a series that provides information for policymakers as they consider ways to make small-dollar loans work better for borrowers. Research is unclear on whether high-interest small loans are beneficial to consumers with poor credit histories, but better regulation is needed regardless. Based on findings from the reports, Pew recommends that when policymakers choose to allow these loans, the following regulations should be in place to minimize harm to consumers and to maintain a marketplace for lenders:

  • Limit payments to an affordable percentage of a borrower’s periodic income.
    (Research indicates that payments above 5 percent of gross income are often unaffordable.)
  • Spread costs evenly over the life of the loan.
  • Guard against harmful repayment requirements or collections practices.
  • Require concise disclosures that reflect periodic and total costs upfront.
  • Continue to set maximum allowable charges for small-dollar-loan markets that serve those with poor credit.”

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