What are the dangers of the payday loans that are so popular in the US?
Short-term payday loans are a popular form of financial assistance for US citizens. This lending is cheaper for the public because it provides quick access to funds and allows people with different banking histories to get money. However, the CRL, an organisation dedicated to responsible lending, warns of the negative consequences of such loans for citizens and the system’s functioning as a whole.
Problems with short-term loans
Payday loans are made in one instalment and are usually around USD 500. This type of loan is popular in more than half of the states. According to the CRL study, annual interest rates on a USD 400 loan can exceed 500%. In Oregon, for example, the rate is 140%, and in Texas, it can be as high as 662%.
A number of US states have already passed laws limiting the size of payday loans to USD 400. However, there is language in this document that prohibits three-figure lump sums. This situation points to problems in the regulation of the US financial system.
CRL presented official statistics on payday lending:
– 37 states in the country allow payday loans;
– 11 states have no clear regulations on these loans;
– more than 12 million US citizens use this type of loan each year;
– 18 states have an interest rate cap of 36%.
According to Yasmin Farahi, director of the CRL, the government needs to tighten control over this lending sector. Moreover, protection should cover all consumer groups. So far, interest rate caps introduced in some regions have shown good results.
Alternative to payday loans
In addition to tighter regulation of the sector, one of the options for combating the popularity of short-term loans in the CRL was the emergence of similar products from banks. The idea is to provide consumers with different credit instruments from trusted financial institutions. The main requirement for them is to increase the flexibility of repayment, which attracts people to quick loans.
Six major US banks have already launched special credit programmes for different population segments. They offer options for loans ranging from USD 500 to thousands of dollars. At the same time, the interest rates are 15 times or more lower than those charged by payday lenders.
Many banks also offer small-dollar loans, a good alternative to high-interest loans. At the same time, the US authorities are encouraging the development of affordable credit programmes with flexible repayment terms.