There were an estimated 11 million people who took out payday loans in 2017, and the Pew Charitable Trust is working to encourage banks and credit unions to offer an alternative. The proposed solution from the Pew Trust may be small dollar loans with a repayment schedule that is based on the borrowers income. The non-profit also wants to eliminate overdraft fees, set maximum interest rates, and make the funds loans affordable.
While many states are starting to place limits on how much a household can borrow from a payday or car title loan company as well as regulate all of the fees and interest rates, these high priced lenders can still be a major problem for those Americans who turn to them. Many of the 11 million + Americans use them as they often have no other alternative. Using any type of loan comes with risks, some have pros, and many variable should be explored. Find more details on payday type loans for paying bills and all the options in the marketplace.
In general, people who use payday lenders have poor credit scores, they are out of the mainstream banking system, have zero savings, or they are facing other financial challenges. But when they turn to one of these companies to borrow money it can often start a cycle of debt that can last many months if not even years.
The amount of fees that borrowers need to pay when it comes to payday loans is astounding. The Federal reserve as well as the Pew Charitable Trust estimate that the average consumer pays about $520 in fees when they take on a $375 payday loan. Now of course that will vary by state and any regulations that may be in place, but the $520 was the average in fees paid during 2017. Therefore some people paid even more money than that! But of course some borrowers may have paid a little less in fees.
The team at Pew Charitable Trust is encouraging banks and credit unions to meet the needs of these borrowers. The non-profit would like to make small dollar loans more accessible to struggling families, and they would like the interest rate as well as monthly payments to be based on the borrowers total household income; with a maximum cap in place.
Since the Consumer Financial Protection Bureau put into place new rules in October 2017 that allowed banks to offer services, the Trust wants community as well as national banks to step up and provide consumers access to cash. The organization feels that small dollar loans offered at a lower interest rate than some of the alternatives can be a great solution.
Benefits to both lenders and borrowers per the Pew Charitable Trust
According to the report released by Pew Charitable Trust in February 2018, lower interest rate, small dollar loans can benefit both the lender as well as the borrower. Lower income families, or those with poor credit, would have more access to loans for paying emergency bills and borrowing money can help them build their credit. Banks and credit unions can benefit by getting a new customer, so source of revenue, and maybe eventually the customer would grow into using other services of the lender, such as pre-paid credit cards, mortgages, or more.
The Trust would like to see the payments made by a borrower based on their total household income, and a cap would be at around 5% of income. The report released in 2018 would also want to see interest rates set in the double digit percentage (not over 100%), eliminate overdraft fees, and set maximum repayment costs based on a percent of the total small dollar loan amount.
Representatives from the National Association of Federally-Insured Credit Unions as well as American Bankers Association have indicated they would review the proposals from the 2018 Pew Charitable Trust proposal. But whether something ever changes or not, time will tell.