The payday lending industry has been in the spotlight for the past year, particularly as regulators turned attention to the world of short-term, small dollar credit. This attention is due in part to misguided criticism leveled by advocacy groups that often assert payday loan customers are harmed by the loans, and also regulators’ recognition that short-term credit products are in-demand and valued by borrowers. To dig deeper into customers’ experiences, we asked one of the nation’s most reputable research firms to engage with our customers and discuss their use of payday loans. Considering the picture critics often paint, the results of this new research are illuminating.
Indeed, the new survey by Harris Interactive “Payday Loans and the Borrower Experience,” released this week finds that the majority of payday loan borrowers value the product, choose payday loans over other options during financial difficulties and importantly, have a firm understanding of the product and repayment terms.
Importantly, nearly all borrowers – 97 percent – said the cost and terms of their loans were as they expected or better. More than four in five said that the loans were easy to repay.
These results show what our industry already knows: consumers are able to make informed decisions about their own finances. Payday loan borrowers not only understand the terms of their loans, but they also value having them as a credit option. This poll demonstrates how important payday loans are as a financial tool and why consumers choose them.
The reasons why consumers turn to payday loans is apparent. A 2011 study by the National Bureau of Economic Research found that half of American households could not come up with $2,000 from all available sources for an unexpected expense in a 30-day period. Roughly half of all American families are living paycheck-to-paycheck, and lack adequate savings to cover unplanned expenses. Millions of Americans simply do not have the cash flow to pay all their bills at the beginning of the month.
Payday loans and other alternative financial services fill this important niche, which is why 15 million people choose to use them each year. As regulators and policymakers pursue initiatives to eliminate illegal or unethical lending practices, it is essential they consider the full consumer experience (the need, access, and use of products) to ensure safe, legal options remain available. Choices empower borrowers to choose the credit solution that is best for them.
Ultimately, pragmatic regulation benefits both consumers and legitimate lenders – the vast majority of our industry – weeding out the bad actors from the reputable lenders and ensuring safe short-term credit options remain accessible. Further, it brings to the forefront a necessary national discussion of the short-term credit needs of those 15 million Americans – needs that for too long national policy has failed to address in a productive way.
The Community Financial Services Association of America and its members have long been at the forefront of consumer protection. We have a set of strict Best Practices in place and a monitoring program to address problems should they occur. We are hopeful that 2014 will be a year of productive discussions with regulators at both the state and federal levels. Our members have more than 20 years of experience making payday loans, giving them the expertise to work with regulators to develop rules that will improve the loan experience for our borrowers.
Payday loans are not only helping people manage financial difficulties, but at a cost of roughly $15 per $100 borrowed, they help people manage these difficulties in an affordable way. This underscores the importance of ensuring that customers have options when it comes to short-term, small dollar credit. As an industry, we have the opportunity to refine our products and better meet the needs of our customers, and we look forward to working to ensure that they continue to be available for those who need them.
Shaul is CEO of the Community Financial Services Association, which represents and advocates for payday loan providers.