Pew study documents effectiveness of payday loan regulations

A recent study released by the Pew Charitable Trusts found that in states with strong legal protections for payday loan customers, the result has been a large net decrease in payday loan usage.  Even more importantly, these protections do not appear to have driven a significant number of would-be borrowers to seek payday loans online or from other sources.

The Bell has been a leading proponent of payday lending reform, which finally passed the Colorado General Assembly in 2010. Based on the most recent data from the Attorney General's Office, Bell staff conservatively estimate these reforms are saving Colorado consumers more than $50 million each year compared to what they would have paid without reform.

Pew's findings in Pay Day Lending in America: Who Borrows, Where They Borrow, and Why are based on an in-depth telephone survey with almost 50,000 payday loan borrowers and on in-depth focus groups in New York City, Chicago, Birmingham (Alabama) and Manchester (New Hampshire).

In states with the most stringent regulations, 2.9 percent of adults report payday loan usage in the past five years (including storefronts, online, or other sources). By comparison, overall payday loan usage is 6.3 percent in more moderately-regulated states and 6.6 percent in states with the least regulation. In states where there are no payday lending stores, just five out of every 100 would-be borrowers choose to borrow payday loans online or from alternative sources such as employers or banks, while 95 choose not to use them at all.

The Pew study also found that while payday loans are sold as two week credit products that provide fast cash, borrowers actually are indebted for an average of five months per year. Additionally, despite the short-term credit promise, the conventional payday loan business model requires heavy usage and a high percentage of loan renewals to be profitable.

According to the report, 12 million Americans use payday loans annually and, on average, a borrower takes out eight loans of $375 each per year and spends $520 on interest.  These findings are fairly consistent with how Colorado's payday loans worked before the reforms were enacted in 2010.

The report attempts to answer six major questions: who borrows? How many people are borrowing? How much the loans cost them. Why do they use payday loans? What other options do they have? And do state regulations reduce payday borrowing or simply drive borrowers online instead?

Findings from the study include:

• 5.5 percent of adults nationwide have used a payday loan in the past five years, with three-quarters of borrowers using storefront lenders and almost one-quarter borrowing online.
• While whites, women and people ages 25 to 44 each make up a majority of borrowers, payday loans are disproportionately concentrated among African-Americans, home renters, those without four-year college degrees, those earning less than $40,000 a year and those who are separated or divorced.
• Survey respondents from across the demographic spectrum clearly indicate that they are using the loans to deal with regular, ongoing living expenses. For example, 69 percent of first time borrowers used the loans to cover recurring expenses, such as utilities, credit card bills, rent or mortgage payments, or food. Only 16 percent dealt with an unexpected expense, such as a car repair or emergency medical expense.
• If faced with a cash shortfall and payday loans were unavailable, 81 percent of borrowers say they would cut back on expenses such as food and clothing. Many also said they would delay paying some bills, rely on friends and family or sell personal belongings.

- George Awour