NASCUS Report Article Repository: Payday Lending
States that have enacted reforms preserved widespread access to credit
Authored by Nick Bourke & Alex Horowitz
Since 2010, four states—Colorado, Hawaii, Ohio, and Virginia—have passed comprehensive payday loan reforms, saving consumers millions of dollars in fees while maintaining broad access to safer small credit. In these states, lenders profitably offer small loans that are repaid in affordable installments and cost four times less than typical single-payment payday loans that borrowers must repay in full on their next payday. This proves that states can effectively reform payday lending to include strong consumer protections, ensure widespread access to credit, and reduce the financial burden on struggling families.
However, in most other states, single-payment payday loans remain common. The large, unaffordable lump- sum payments required for these loans take up about a third of the typical borrower’s paycheck, which leads to repeated borrowing and, in turn, to consumers carrying debt for much longer than the advertised two-week loan term. In previous research, The Pew Charitable Trusts has found that single-payment loan borrowers re-borrow their original principal, paying multiple fees, for five months of the year on average. Additionally, some lenders have shifted from single-payment to high-cost installment payday loans to evade consumer protections.
In 2014, Pew reviewed state payday loan regulations and prices to better understand marketplace trends.5 This brief updates that study using data from regulators in the 32 states that allow payday lending (18 states and Washington, D.C., do not) and advertised pricing from the nation’s six largest payday lenders to determine available loan types and costs as well as applicable consumer protections. This analysis shows that lawmakers in states that allow payday lending and wish to preserve the availability of small credit can do so and protect consumers at the same time by enacting comprehensive reforms.