Over the past few weeks, much has been discussed in the media about payday lending, how the industry has grown in Texas and what the implications are for our state. We’ve been working on providing alternatives to payday lending through our Financial Opportunity program for a few years. It’ s a complex issue with many facets – so our experts worked together to break it down and answer some questions.
What is a payday loan?
A payday loan is a small, unsecured, high-interest, short-term cash loan that needs to be repaid within two weeks or by the next payday. Borrowers are looking for an average of $500 [PDF], and in Texas, 67 percent of loans are for $500 or less [PDF]. In most cases, borrowers write a post-dated personal check for the advance amount plus a fee. The lender holds the check for the loan period, and then either deposits it or returns the check when the borrower pays in cash.
Why do individuals use payday loans?
There is a misconception that payday loans are use for unexpected emergencies, like medical bills or car repair, but the the Pew Charitable Trust found that 69 percent of people took out their first payday loan for “a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food.” Oftentimes, borrowers may need to pay bills a few days or a week before their paycheck, so payday loans function as an ‘advance’.
What are the benefits of payday loans?
The biggest benefit is speed – payday loans offer quick infusions of cash. Individuals who do not have savings or a financial cushion may need quick cash to cover bills. Typically, lower-income individuals are faced with these types of difficult decisions because they have less wiggle room in their finances.
Also, payday lenders can be obtained easily. Often, lenders don’t perform a credit check and the majority of those who apply do get the loan.
What are the dangers or draw backs of payday loans?
Payday loans are riskier than other loans and thus have higher interest rates: nationally, borrowers spend an average of $520 on interest for a $375 loan, according to the previously cited Pew study, and in Austin, borrowers spent $22.37 for every $100 borrowed, according to the Center for Public Policy Priorities. Also, payday loans are often not paid back in time – 61 percent of consumers in Texas extended their loan, incurring even higher fees. Because of high rates and the number of loans that are extended or not paid back, payday loans can be a slippery slope into a longer cycle of debt, which can have long-lasting effects.
What are Texas laws about payday lending and how are they different from other states?
In the US, 13 states have banned payday lending and several others have restrictions on the interest rate or associated fees. Texas is one of few states that does not have any statewide regulations on payday loans, and overall our state is defined as ‘permissive’ when it comes to payday lending.
Individual cities have enacted their own ordinances, including Houston, San Antonio, Dallas and Austin. The City of Austin ordinance requires that individuals borrow less than 20 percent of their gross monthly income, that the loan include a maximum of four payments, which each pay down 25 percent of the principal and that the number of times a loan can be extended is limited to three.
It’s worth noting that in the Austin-Round Rock area, consumers spent $33 million in payday and autotitle loans in 2012, after the previously mentioned legislation was enacted.
Why are payday loans an issue right now?
A few circumstances are bringing payday loans to the forefront nationally and locally:
- Data is beginning to come in on the impacts of the industry, since 2012 was the first year that businesses started reporting to the Office of Consumer Credit Commissioner on the number of loans, fees and other info.
- The Consumer Finance Protection Bureau, a newly formed Federal agency with oversight over lending practices, has just started taking actions after lending they’ve defined as unfair.
- In Texas, Democrats have called for the resignation of William White, the chairman of the Texas Finance Commission, which oversees agencies that regulate banking and lending. White is also the vice president of Cash America, a payday lender. The issue has taken to the forefront of the race for governor.
What can I do to find out more?
UWATX has developed an extensive toolkit on borrowing, saving and other financial issues.