The Insight Center for Community Economic Development released its latest report finding the payday lending industry cost the American economy $774 million in 2011, causing the estimated net loss of more than 14,000 jobs. Add in the costs caused by an increase in Chapter 13 bankruptcies from borrowers unable to keep afloat of the draining debt cycle, and costs soar to nearly $1 billion.
The study also found that payday lending caused an estimated 56,250 Chapter 13 bankruptcies in 2011.
According to Tim Lohrentz, Program Manager at the Insight Center and author of the report, “Payday lending generates economic activity, but the gains are less than the resulting losses, since the cost of payday loans- averaging over 400 percent annually- reduces household spending.”
The report reveals that in 2011, payday lenders received interest payments totaling 3.3 billion. But each dollar of that interest subtracted $1.94 from the economy through reduced household spending while only adding $1.70 in spending by payday lending establishments. The net impact is a 24-cent loss to the U.S. economy for every dollar of interest paid.
The Consumer Financial Protection Bureau recently accused payday lenders of ‘trapping borrowers in a cycle of debt,” a practice examined in the Alliance for a Just Society’s Past Due report. The report released in January 2013 looks at the impacts the payday lending industry has on low income and communities of color in Idaho. The solutions while developed with a state level focus offer additional policy options to address nationally.
As people across the nation recover from the heaviest economic recession seen since the Great Depression, payday loan centers attain record profits which place a drain on the U.S. economy. Payday loan centers have found an easy target to capitalize upon the economic hardships and misfortune of others. Their pockets and profits increase, while the wealth of the nation decrease.
“Past Due” Recommendations
ACCESS TO CREDIT
The report stresses the importance of providing access to credit with reasonable terms. If given alternatives, borrowers would not be forced to accept payment terms with triple-digit interest rates.
REQUIRE A REPAYMENT PLAN IN MULTIPLE INSTALLMENTS
Washington State currently requires payday lenders to offer installment repayment plans for borrowers who request them prior to default. Such repayment plans make a payday loan similar to traditional loans in structure and may allow borrowers to pay down the principal and interest over time, rather than making large, lump sum payments that are more difficult to afford.
VERIFY REPAYMENT ABILITY
States should require that payday lenders verify and document a borrower’s ability to repay the loan. Using credit scores, income, or assets to verify a borrower’s ability to repay and to set allowable loan amounts may maintain access to essential credit while requiring the lender and borrower to consider repayment ability. Many banks and credit unions that participated in the FDIC pilot program used more stringent underwriting, such as credit reports, to verify ability to repay and to set loan amounts, without actually requiring high credit scores for the loan — this will likely cut default costs to lenders and thus allow lenders to offer more competitive products.
RESTRICT AGGREGATE AMOUNT OF TIME WITH PAYDAY LOANS
Restricting the total time that a single borrower is in debt over a specified time period will allow borrowers to access necessary credit when it is urgently needed, but to cut down on repeat borrowing that outlasts loan terms. States should mandate limitations on the total amount of time a borrower is indebted per year, on loans with interest rates higher than 36 percent, as recommended by FDIC guidelines.