Wednesday, June 19, 2013

Payday Lending Review

Preparations for a Payday Lending presentation have been pretty eye opening in terms of the loan volume and costs associated with payday loans. The Consumer Financial Protection Bureau (CFPB) conducted a study on the industry which revealed some big numbers. There were roughly 90 million payday loans given to borrowers nationwide in 2012. A detailed sample review of 15 million payday loans showed that the median payday loan was for $350, for a period of 14 days, at an average cost of $15 per $100 borrowed. The average annual percentage rate the CFPB reported was 322% APR. 

Nearly half of the sample group (48%) of payday borrowers had more than 10 transactions with payday lenders during the 12 month period. 14% of the same group actually had 20 or more loans during the 12 months. A high percentage, 76%, of the industry's total loan volume comes from repeat loans and rolled over loans. These loans may be advertised for short term, emergency purposes but they most often become long term debt problems of the consumer. 

There are roughly 1,179 payday lenders in Alabama. The State of Alabama allows a maximum rate of 456.25% APR on payday and cash advance loans. The Alabama Legislature was reviewing a payday lending bill during the 2013 regular session that would have reduced the maximum APR from 456.25% down to 36.00% APR. The bill would also have set the minimum term to 30 days, limit the number of loans per year, and would have established a database to monitor these type of loans. The bill never was introduced outside of the committee. Hopefully this issue will be revisited   during the 2014 regular session with more successful results. 

Payday loans are very popular as evidenced by the many storefront locations throughout our city and state. Online payday lending is now a growing trend in this industry. These are high cost loans to say the least. Consumer education is needed to compare the various financing options. There are other options available. Most credit unions offer higher risk, small balance loans to members who have established member relationships. As a state chartered credit union, North Alabama Educators Credit Union can charge no more than 19.00% APR on a personal loan which is far less than the 322.00% APR average rate reported by the CFPB.