Most repay their payday loans without defaulting
The province of Utah has enacted important consumer safety protections for borrowers of payday loans, including a requirement that lenders offer an extended payment plan. This interest-free repayment option was codified into legal philosophy at the urging of our trade association for those who require more time to repay their loan. These protections enhance the value of the payday loan option for all consumers.
This important customer option is similar to the one dictated by my organization, the Community Financial Services Association of America (CFSA), in our industry-leading mandatory member best practices. Utah’s law allows the consumers more time to return their loans over a period of additional weeks at no additional charge and without accruing interest. Unfortunately, a recent Salt Lake Tribune article (“45,000 Utahns could not pay off payday loans last year” Oct. 11) mis characterizes the payday lending industry in Utah and the customers it serves, citing the number of borrowers enrolled in extended payment plans. This number adds up to less than 7 percent of all borrowers.
It is not only incorrect to tell that the data show a significant number of borrowers default on their loan after the initial 10-week time period. There has also been clear and actual evidence that payday consumers succeed and thrive when using the product. Further, under the state’s law, these borrowers cannot be labeled in “default” as some have claimed, which helps to protect their credit ratings.
A Consumer Financial Protection Bureau report found that more than half, 55 percent, of payday borrowers, obtained only one or no additional loan after paying back their initial loan. In Utah, an analysis from the Utah Department of Financial Institutions shows in 2014 just nine consumer complaints were filed toward payday lenders, and all were resolved satisfactorily. Similarly, recent analysis of federal consumer complaint data registered with the CFPB revealed that just 1.5 percent of complaints are related to payday loans.
CFSA’s strict set of mandatory member best practices, provides many important precautions for consumers and are often more consumer oriented than some state laws. While not all payday lenders are members of CFSA, we often advocate for enhanced consumer protections, as was the case for Utah’s extended payment program.Consumers use payday loans to generate through a financial pinch, typically for a relatively short period of time. The vast majority use payday loans responsibly to make informed choices around what is best for their finances. According to a Harris survey of consumers, 96 percent of borrowers report their experience with the term and price of their loan was as expected or better than expected. Similarly, nine in 10 said that before hiring out a payday loan, they carefully weighed the risks and benefits of doing so and did the math on the overall cost they would incur.
The bottom line is payday loans are often the best and least costly choice for consumers when compared to alternatives, such as overdraft usage, bounced checks, late payments on credit cards and utility re-connections, among others.While there is significant opportunity for the financial services industry to better serve all consumer credit needs, and it is important talk about is seeing the need for reforms will help properly protect consumers from unscrupulous lenders, we must preserve existing products that seem to work well for the great majority of Americans.
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