PA Payday Loan Cap/How Bad are They Really?
(Background info. I'm in an MBA program and part of it is bi-weekly forum posts. This week was interesting enough/long enough to merit more attention than unread forum for 11 people. I'm not an expert but these were my thoughts while researching the topic of payday loans for a class.)
I’m an avid listener to NPR and interestingly enough, yesterday there was a small bit on payday loans (as well as a couple weeks ago a more in-depth segment). They talked about how the problem with payday loans isn’t when they’re used once, but when they’re used repeatedly. Having to pay the fees for the first loan makes the second paycheck not go as far as it should, needing a second loan. It’s just a terrible cycle that adds up to a HUGE interest rate. The second more in-depth segment discussed a study of payday loans and found that when people were given more information about the exact details and ramifications of these loans they were less likely to take them out. It showed that a lot of people using these services were for lack of a better term, ignorant as to how they worked and just a little bit more information caused them to change. (I’ve searched for these program yesterday to provide a reference but I couldn’t locate it) These are the problems that most people see from payday loans.
As I live in PA I initially wanted to research PA’s payday loan laws and I found out that it is one of 14 states that make payday loans illegal (or at least heavily capped). (Which is probably why I’ve never experienced this thing firsthand/through friends) “Per 63 Pennsylvania statute Ann. § 2325, payday loans are prohibited. Small loans are allowed but interest is capped at $9.50 per $100 borrowed and a maximum service charge of $1.50 per $50 each year, up to $150.” This law was passed in 1998 and hasn’t changed since, despite huge support by loan agencies. These are much more restrictive than many of the other capped states mentioned on this discussion board. They’re designed to keep predatory loans from being made and people getting trapped in debt roll-over cycles. By declawing the industry like this (and essentially removing payday loans) the laws were “successful” by defining success as stopping this industry.
I’m an avid listener to NPR and interestingly enough, yesterday there was a small bit on payday loans (as well as a couple weeks ago a more in-depth segment). They talked about how the problem with payday loans isn’t when they’re used once, but when they’re used repeatedly. Having to pay the fees for the first loan makes the second paycheck not go as far as it should, needing a second loan. It’s just a terrible cycle that adds up to a HUGE interest rate. The second more in-depth segment discussed a study of payday loans and found that when people were given more information about the exact details and ramifications of these loans they were less likely to take them out. It showed that a lot of people using these services were for lack of a better term, ignorant as to how they worked and just a little bit more information caused them to change. (I’ve searched for these program yesterday to provide a reference but I couldn’t locate it) These are the problems that most people see from payday loans.
As I live in PA I initially wanted to research PA’s payday loan laws and I found out that it is one of 14 states that make payday loans illegal (or at least heavily capped). (Which is probably why I’ve never experienced this thing firsthand/through friends) “Per 63 Pennsylvania statute Ann. § 2325, payday loans are prohibited. Small loans are allowed but interest is capped at $9.50 per $100 borrowed and a maximum service charge of $1.50 per $50 each year, up to $150.” This law was passed in 1998 and hasn’t changed since, despite huge support by loan agencies. These are much more restrictive than many of the other capped states mentioned on this discussion board. They’re designed to keep predatory loans from being made and people getting trapped in debt roll-over cycles. By declawing the industry like this (and essentially removing payday loans) the laws were “successful” by defining success as stopping this industry.
Part of my research on this topic was listening to an episode from one of my favourite podcasts, Freakinomics, “Are Payday Loans as Evil as they say?” They did a good job a laying out the arguments from both sides. The main argument FOR payday loans is that it’s a way for hard working Americans to make sudden payments and unexpected costs. By denying/regulating the industry in this way, you’re keeping credit/loans from the people that really need it. But the problem is that this is not how these payday loans are used. They are used repeatedly, to cover regular expenses and not surprises, often the fees rollover and majority of the fees gathered on these loans are from people who take 10 loans a year or more. These regulations were designed to keep people from falling into that trap of credit debt, but the problem is that it denies those “legitimate” uses of payday loans.
Initially, before doing any research, I would have just said “Yea, these regulations keep people from doing something financially silly and I support them,” but after researching, especially the Freakinomics episode, I don’t quite know. They offered some really good examples as to why these practices aren’t that bad. (According to research, most people DO understand the limits of these loans and 60% of people pay them back on the right time. A majority of the people who use these services are satisfied and most of the arguments against come from the people outside. The people that use these services actually appreciate them and don’t want them to go away. An argument presented was that with so many overdraft/underfunded charges that banks and checking accounts and payment plans, it’s actually MORE financially feasible to take out one of these loans to avoid all of these extra charges and fees. The relative cost for “renting money” is actually comparable to renting other things like cars and housing.) He also cautioned the truthfulness of some of these studies, but that’s just something to ALWAYS keep in mind when it comes to academic studies (they are never in a bubble and there’s no such thing as objectivity completely). So in the end, I think that these regulations are a little bit too stifling, it’s unwise to completely destroy an industry because a few bad apples are taking out too many loans that they can’t afford. A suggestion mentioned at the end of the episode was that repeat offenders would not be rolled over constantly, but instead placed on a more reasonable loan payment schedule. Even though this is where a lot of the loans profits are coming, it’s also an incentive to keep the rates at the right spot and not artificially lowered like they are now. It’s a thin balance between the self-balancing of a free market pricing (they can only charge as much as people are willing to pay) and the demands placed upon consumers that force them to turn to these solutions.
In the end, I think the regulations need to be changed, not so heavily penalized but also proactively protecting the people who are in those roll-over credit cycles. More research needs to be done as to the effectiveness of these programs because right now, it’s not as conclusive as people think. A lot of evidence is anecdotal and we have a tendency as humans to remember the odd one out and think that those occurrences are more common than they actually are. (We remember quit vividly the store down the street getting robbed but not the 200 stores that haven’t been robbed) It’s important to be cautious with these industries, because it’s people’s financial future at stake, but we also need to make sure our assumptions are based off of actual reports and numbers and not just on hunches. Businesses see and fill needs, people need money and they will find ways to lend it (whether by finding loopholes or exploiting the rules (Payday loaners are moving to more long term loans to get around the restrictions in place)). So I think the government shouldn’t just stop it completely (as that won’t be possible) but rather to make sure it’s done in a safe, non exploitative way.
References -
Arvedlund. Erin, Don’t Undermine State Laws Against Payday Loans, CFPB urged, June 3, 2016 - http://www.philly.com/philly/business/20160603_Don_t_undermine_state_laws_against_payday_loans__CFPB_urged.html
Davies, Dave, Fresh Air, Jan 10, 2017 - What is Driving the Unbanking of America?
https://www.npr.org/2017/01/10/509126878/what-is-driving-the-unbanking-of-america
Dubner, Steven - Freakinomics - Are Payday loans as evil as they say? Retrieved from - http://freakonomics.com/podcast/payday-loans/
Are payday loans legal in PA state? - Retrieved from - https://www.cathydoesloans.com/usa/pennsylvania/
Pennsylvania Payday Loan - Retrieved from - https://www.samedaypayday.com/Pennsylvania-Payday-Loan
Initially, before doing any research, I would have just said “Yea, these regulations keep people from doing something financially silly and I support them,” but after researching, especially the Freakinomics episode, I don’t quite know. They offered some really good examples as to why these practices aren’t that bad. (According to research, most people DO understand the limits of these loans and 60% of people pay them back on the right time. A majority of the people who use these services are satisfied and most of the arguments against come from the people outside. The people that use these services actually appreciate them and don’t want them to go away. An argument presented was that with so many overdraft/underfunded charges that banks and checking accounts and payment plans, it’s actually MORE financially feasible to take out one of these loans to avoid all of these extra charges and fees. The relative cost for “renting money” is actually comparable to renting other things like cars and housing.) He also cautioned the truthfulness of some of these studies, but that’s just something to ALWAYS keep in mind when it comes to academic studies (they are never in a bubble and there’s no such thing as objectivity completely). So in the end, I think that these regulations are a little bit too stifling, it’s unwise to completely destroy an industry because a few bad apples are taking out too many loans that they can’t afford. A suggestion mentioned at the end of the episode was that repeat offenders would not be rolled over constantly, but instead placed on a more reasonable loan payment schedule. Even though this is where a lot of the loans profits are coming, it’s also an incentive to keep the rates at the right spot and not artificially lowered like they are now. It’s a thin balance between the self-balancing of a free market pricing (they can only charge as much as people are willing to pay) and the demands placed upon consumers that force them to turn to these solutions.
In the end, I think the regulations need to be changed, not so heavily penalized but also proactively protecting the people who are in those roll-over credit cycles. More research needs to be done as to the effectiveness of these programs because right now, it’s not as conclusive as people think. A lot of evidence is anecdotal and we have a tendency as humans to remember the odd one out and think that those occurrences are more common than they actually are. (We remember quit vividly the store down the street getting robbed but not the 200 stores that haven’t been robbed) It’s important to be cautious with these industries, because it’s people’s financial future at stake, but we also need to make sure our assumptions are based off of actual reports and numbers and not just on hunches. Businesses see and fill needs, people need money and they will find ways to lend it (whether by finding loopholes or exploiting the rules (Payday loaners are moving to more long term loans to get around the restrictions in place)). So I think the government shouldn’t just stop it completely (as that won’t be possible) but rather to make sure it’s done in a safe, non exploitative way.
References -
Arvedlund. Erin, Don’t Undermine State Laws Against Payday Loans, CFPB urged, June 3, 2016 - http://www.philly.com/philly/business/20160603_Don_t_undermine_state_laws_against_payday_loans__CFPB_urged.html
Davies, Dave, Fresh Air, Jan 10, 2017 - What is Driving the Unbanking of America?
https://www.npr.org/2017/01/10/509126878/what-is-driving-the-unbanking-of-america
Dubner, Steven - Freakinomics - Are Payday loans as evil as they say? Retrieved from - http://freakonomics.com/podcast/payday-loans/
Are payday loans legal in PA state? - Retrieved from - https://www.cathydoesloans.com/usa/pennsylvania/
Pennsylvania Payday Loan - Retrieved from - https://www.samedaypayday.com/Pennsylvania-Payday-Loan
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