Congress Is Stepping Up Its Efforts To Kill Payday Loans

The job losses induced by COVID-19 are a catastrophic development for millions of Americans who could least afford it. Between skyrocketing healthcare costs, a lack of safety net, and now unemployment, these are desperate times for many people. 

And it’s not inconceivable that during this some will fall into the payday loan trap. Fortunately, the payday loan industry—lenders who lend to financially vulnerable consumers while charging enormous, often unaffordable, fees and interest rates—has been in decline for some time now. 

Alphabet Inc GOOG GOOGL recently announced it was banning payday lenders from its Google Play app store. And Utah, the state where much of the payday loan industry is located, found that one in four payday lenders had shut down in the last four years. 

In an effort to squash payday loans once and for all, a group of bi-partisan lawmakers announced they are planning to introduce legislation that would expand consumer protections by putting a cap on interest rates for payday, car title, and installment loans for all Americans. The bill, the Veterans and Consumers Fair Credit Act, will build on the 2006 Military Lending Act, which capped interest rates on loans to active-duty military to 36%. 

For context, the St. Louis Fed found calculated the APR on a typical payday loan of 391%. 

"It's hard to imagine who would want to take out a loan with an interest rate of 150 or 200% a year," Rep. Glenn Grothman, R-Wis. said. "There is no way that is in anybody's best interest at all, and taking advantage of people who are either in desperate straits or more likely just plain financially illiterate is immoral."

Who Is Falling Prey

The payday lending industry has received far more scrutiny in recent years, as new regulatory bodies like the Consumer Financial Protection Bureau coupled with the rise of alternative lenders has shined a light on the predatory practice (HBO’s Last Week Tonight even did a 16-minute segment on it back in 2014). But that hasn’t stopped all consumers from borrowing. 

A recent CNBC/Morning Consult survey found that 26% of millennials and Gen X’ers had taken out a payday loan in the last two years, while 15% of Gen Z and Baby Boomers said they had done so. And the problem is not just limited to America. In Australia, 30,000 payday loans are taken out a week, with the amount borrowed likely to exceed $1.7 billion by the end of the year. 

Some states have taken matters into their own hands. California recently enacted a bill that blocked lenders from charging more than 36% on consumer loans of $2,500-$10,000. Ohio capped auto loan interest rates at 28% in April. Grothman also said the federal bill would not supersede state legislation. 

Industry advocates argue that putting a cap on payday loans will significantly hinder the ability of cash-strapped consumers to get short-term loans. 

Rather than resort to using a payday lender, consumers in need should look for services that provide a ladder to better credit. A growing list of modern online lenders provide consumers with more options than ever for getting access to cash if they need it.