Payday Lending Reform

The Pew Charitable Trusts organization recently released a third report in their “Payday Lending in America” series.  The report discusses policy solutions providing safeguards making payday loans safer.  The report also focuses on a Colorado law that applies some of these safeguards.

Among other things, the report found that payday loans are unaffordable for most borrowers because repayment requires about one third of a borrower’s paycheck, resulting in subsequent borrowing.  According to the report, most payday loan borrowers can afford to put only 5% of their income toward loan repayment and still meet their basic expenses. 

According to the report, of the 35 states that allow payday lending today, Colorado is unique in its approach of focusing on affordability by transforming these loans from lump-sum to installment products.  However, the report states that consumers support even more regulation of this market.

 

The report provides the following policy recommendations to make payday loans more safe, transparent, and predictable:

1. Small-dollar cash loans should be prohibited if they require payments of more than 5% of pretax income.
2. Costs should be spread evenly over the life of the loan.
3. Harmful repayment or collection practices should be guarded against.
4. Disclosures that reflect costs should be required.
5. Maximum allowable charges should be set.