Why is Payday Lending Still a Thriving Business? | Payday Now
Despite the fact that payday loans are banned across 15 states, the payday loan firms have prospered, gaining strong allyships with major banks such as JP Morgan Chase and Wells Fargo. That’s the conclusion of research by the Pew Charitable Trusts in the second issue of the payday lending for America series.
A lot of payday loan companies have discovered ways to get around the restrictions and have moved their operations online in states that are more friendly, or even to countries such as Malta as well as in the West Indies where they can stay clear of interest rate caps.
The report states that close to 12 million Americans are able to take out payday loans each year, and the average borrower ends up being in debt for 5 months and has to pay $520 in finance fees on loans that range from $375 to $320. Many borrowers are in desperate need of cash fast and 58% suffer from constant financial issues instead of temporary financial emergencies.
Although 55% of the people who take out loans were white, CNN points out that the groups of people who will most often obtain payday loans are those who earn less than $40,000 a year divorcees, people who are who do not have a four-year college degree. In states that do not have a prohibition on payday loans establishment of storefronts, businesses open stores in communities that meet those descriptions and target the most vulnerable and less financially educated customers.
In states that have a ban on physical stores in order to avoid the practice, online payday loans are flourishing, frequently with more expensive fees and rates as compared to brick mortar counterparts. No matter the reason they all offer quick cash, with no credit checks, and a two-week repayment period which appears to be easy until you realize that their loans are continuously renewed, and the associated charges and interest rates that are high are automatically deducted from their account at the bank.
This is the way that big banks are involved. They don’t actually originate those loans. However, they do allow lenders to pull the funds automatically from banks of borrowers regardless of whether loans are not allowed at all. In the words of Josh Zinner, consumer advocate and co-director of the Neighborhood Economic Development Advocacy Project mentioned in New York Times, “Without the assistance from banks to process and send electronic funds the lenders would be unable to function.
Even those who are able to repay their loan often find out that their banks, which are supposed to be safe, have given permission to payday loan firms to renew the loan and allow withdrawals even after customers have canceled the loan. The New York Times mentions that customers need to contact the lender online at least three days prior to the next cash withdrawal. In other cases, the lender will automatically renew the loan at least once a month and only withdraws the interest due regardless of the fact that, according to federal law, consumers can stop withdrawals from their accounts.
Subrina Baptiste as well as Ivy Brodsky, two women interviewed in the Times report on this method, tried multiple times to shut down the accounts. Baptiste was able to obtain two loans through online payday services that had rates of more than 500 percent. These high-interest rates infringe on New York State law, however, when Baptiste requested Chase to stop payments they advised her to get in touch with the lender. The account was shut down three months after she demanded that withdrawals are stopped but it was not before she had incurred significant costs. Brodsky also utilized an online lender and was attempting to shut down the account back in March of 2012. The lender stayed open for another two months, which was enough time to accumulate overdraft charges as well as other fees.
Pew discovered that there is strong support for regulation. Borrowers support the idea by a three percent margin. However, further protection from this practice, and particularly from the bank’s cooperation might have to be negotiated at the state level. In the Times mentions the Attorney General of Minnesota already reached an agreement with one company as well as Illinois is launching an investigation of its own. The battle to regulate this business is likely to belong in part due to the differing laws across the different states, but also due to the fact that as Arkansas’ Attorney General states that it is difficult to take on Internet firms that don’t have an actual home.
In the meantime, The Online Lenders Alliance is lobbying for legislation to create an overall charter for the business. It is yet to be determined how much support there is for such legislation or, if it is passed, whether it gives regulators more power or gives legitimacy to an industry that 15 states have decided that it shouldn’t be initially.