After years of operating as reigning short-term creditors, so-called payday lenders may soon see their demise.
Regulators in the U.S. are cracking down on the lenders, who often provide quick loans at high costs to the borrower. CCTV America’s Shraysi Tandon reports.
Payday lenders have been around for decades. Their role is to provide a valuable service to lower income people. The lenders offer small, short-term loans, typically used to help the borrower until they get their next paycheck.
A typical payday loan averages $375. The loan is due in 14 days and carries an average fee of $55 per pay period.
Now all that may sound reasonable, if borrowers paid the loans back in time. But many don’t. A whopping four out of five loans are rolled over. And that’s when things get ugly.
The Consumer Financial Protection Bureau said that in some states, payday lenders charge over 500 percent in annual interest rates. Some also resort to illegal tactics to try and recoup the money. They’ve been known to harass borrowers, calling them continuously, taking money directly out of their bank accounts, and falsely threatening to arrest them.
Regulators across the U.S. are now trying to impose tougher rules, in an attempt to regulate and crackdown on payday lenders. Experts say, the move is a step in the right direction, but the issue at hand is much bigger.
“On the one hand, it’s a good move because the people getting these loans don’t understand how bad things can get if they don’t pay them back. So one solution to go after the lenders who are being exploitative. But it’s also important we recognize there is a significant fraction of the United States that is unbanked.” – Arun Sundararajan, Professor, NYU Stern School of Business.
The problem of payday lenders and unbanked borrowers is not exclusive to the U.S. Many countries around the world face similar battles.
“One in three people in China, half of Indian households, 40 percent of Brazilian households don’t have bank accounts and so I think part of the solution isn’t just going after the lenders who clearly exist because there is no alternative source of credit for these people.”
While going after payday lenders may protect borrowers from falling into a debilitating debt cycle, industry observers say the root of the problem needs to be addressed. That is providing safer credit solutions for the millions of unbanked Americans.