EVERY year, millions of Americans in need of a short-term loan to fix a car, fly to a sick relative’s bedside quickly, or make up for childcare payments, go to payday lender rentals online or through one of the thousands of Payday Lenders of shop windows. These are not people without credit or permanent jobs. You just can’t borrow such small amounts through the traditional banking system.
What could start out as a $ 500 lifeline can quickly become a heavy burden. Annual interest rates on payday loans tend to be between 391 and 521 percent, according to the Center for Responsible Lending, and most of the people who take advantage of them pay more fees over the course of the year than they were originally given as a loan. Nationally, borrowers spend approximately $ 8.7 billion annually on payday loan fees.
The United States government could put billions of dollars in the pockets of these consumers by solving a small regulatory problem and allowing banks to get into the small credit business.
Currently, the Office of the Comptroller of the Currency, which regulates banks, has such strict underwriting standards that it costs banks more to meet the paper-intensive requirements than they could reasonably charge for such small sums of money. In fact, in practice (though not usually) the regulations have forbidden banks to offer small loans to a wide range of people. Encouraging banks to lend small sums would benefit both banks and customers.
I’m in the middle of doing research in several parts of the country with low- and middle-income households living from paycheck to paycheck. Some of them use loans to cope with fluctuations in their budgets. And they’re not the one without a bank account – a checking account and income are both required to secure a payday loan.
We should change the rules so these customers stay in the financial mainstream and don’t leave banks where they already have accounts just to borrow a few hundred dollars. The high interest rates and aggressive collection practices of payday lenders cause consumers to lose their bank accounts and sometimes leave the formal banking system entirely. Well-structured small bank loans that are repayable in installments could prevent that.
While these loans will never make up a large portion of bank revenues when compared to mortgages and credit cards, some banks are Interest to offer them. A state regulation frame Issued this year by the Consumer Financial Protection Bureau, banks offer an initial way to extend credit with payments capped at an affordable 5 percent of monthly income. Some credit unions already give out such loans and a survey of the Pew Charitable Foundations estimates that a $ 500 loan to a typical borrower would cost about $ 250 in borrowing costs over a six month period. The same loan from a payday lender usually costs well over $ 1,000.
So far, policy makers have suggested a much more complex way to approach this: let the Post do it. Senator Elizabeth Warren, Democrat of Massachusetts, suggested that the Post offers low-cost financial services like small loans to compete with the payday lenders, with the banks helping in the backend. It would be “the public option” for small-scale finance, but it would require building a new service infrastructure and acquiring new skills. Even if the idea of the postal service could be implemented without technological breakdowns, the idea already meets with political resistance.
Banks are in a stronger position to both meet emergency needs quickly and scale in business. There are nearly 100,000 bank branches in the United States, and most banks could lend their customers through their websites, mobile platforms, ATMs, or automated telephone systems. This would help keep the overhead costs down, which is the main reason for high payday loan prices. Unless regulators require excessive underwriting and documentation procedures for loans that meet basic security guidelines, issuing costs will also be low. Losses on these loans are typically modest as having access to a customer’s checking account provides lenders with strong collateral. Credit unions that have offered such services have only written off between 2 and 4 percent of their loans.
In contrast, the Post Office doesn’t have easy access to a person’s financial history, the ability to see if the resources may be there to repay the loan, or the numerous platforms that customers can already apply for and get a loan on.
When it comes to financial inclusion, it is tempting to focus on people who are not considered part of the financial mainstream. But most of the people who use fringe financial services are actually bank customers, and we should find ways to keep them in the banking system instead of taking the risk of them failing. Banking services should be tailored to their needs, and regulation should not portray large groups of middle- to low-income customers as “too small to help”. If our banking system is to become an inclusive system that works for everyone, not just the wealthy, allowing banks to offer small installment loans would be a good start.