Here’s something nobody expected would happen. After the many criticisms payday lending has received in the last few years from some quarters, and the recent laws and restrictions imposed on the industry, it was expected that payday lending would go down steeply. Almost everybody was expected to stay away from these lenders because they supposedly exploit their customers by charging so called steep interests. In fact, many predicted that the payday lending industry would go out of business soon and even seemed worried about the unemployment this would generate.
But here’s what actually happened. According to a report published by the Department of Business Oversight in California, the numbers of payday loans the seniors are taking in the state have actually tripled over last year. Yes, that is three times more. In other words, payday lending has become more popular in California, in spite of the negative press the industry has received and all the restrictions imposed.
Number of Payday Loans Goes Up From 945,000 to 2.7 Million
The report says, seniors in the state, aged 62 or more, took 2.7 million payday loans last year. In 2015, by contrast, people in the same age group took fewer than 945,000 loans. The Department of Business Oversight is at a loss to explain why this happened. They are confused, to say the least. The study also reveals that many seniors in California are taking payday loans multiple times.
Many in the state are taking this trend very seriously and are saying that this could be here to stay. In fact, 2017’s data when released might even reveal that even more seniors are taking payday loans for more times in the state. Others are pointing out that California is often seen as the harbinger of a national trend, so there is every possibility that this trend could soon be seen across the country. After all, there have been several instances where things happening in California first, spread across the US later.
The State of Payday Lending in California
According to statistics, there are about 2000 payday lending stores in California. Most of these businesses are located in poor neighborhoods, operating among people who are most likely to have low cash reserves in the middle of the month. Historically, those who have taken these loans the most are colored people (mostly blacks), single mothers and people from the Latino community.
Research findings of the California Department of Business Oversight (DBO) has also confirmed that most individuals who are taking payday loans in the state live in poorer neighborhoods and are from these communities. This is the government agency, which oversees financial service providers, including payday lending businesses, in the state.
Their research revealed that in the neighborhoods with the most payday lenders, the family poverty rates were usually higher than the state average. Also, the percentage of poor families with single mothers was higher. This was confirmed after the agency looked at the 2014 census data relating to the location of payday lending stores.
The DBO concluded by saying that Caucasians or whites are less likely to take payday loans, while blacks, Latinos and single moms are more likely.
Payday Lending Is Not Making People Fall Into a Debt Trap
Those who are critics of payday lending often state that those who take these loans fall into a debt trap soon, so payday lending is contributing to poverty. The California Department of Business Oversight does not state this, however. It’s not a case of a payday lender making people impoverished. It’s the other way round, the agency states. The lenders have their stores in these neighborhoods because the people who live there are impoverished, and need cash.
CFSA or the Community Financial Services Association of America, the trade group of payday lenders, agrees with this view. In their website they have said, “Just like Home Depot and Costco, payday advance stores are located in population centers that are convenient for where customers live, work, and shop”.
The Santa Monica, California-based Milken Institute carried out a study of their own a few years back, and they arrived at the same conclusions as the DBO. Their 2013 study noted that payday lending businesses were catering to a “specific set of customers”. Their customers are mostly those with lower incomes, less formal education, and those from minority communities.
The study carried out by the Milken Institute also discovered that there were more payday lending stores in counties where there was a higher percentage of Latino and black people than those counties with more whites. So the Institute concluded by observing that there is “a negative correlation between income per capita and the number of payday lending stores per capita”.
Payday Lending Demographics Has Changed
The Milken Institute report came out in 2013. A lot has changed since then, as the California Department of Business Oversight research findings show. Now, it’s not just the blacks, Latinos, the poor and marginalized sections of the society that are asking for payday loans. Even the seniors who are aged more than 62 years are taking these loans, and many of them have retirement plans.
This clearly reveals several truths
1. Economy of the United States is in such a state that those who did not require a loan before, such as the seniors with protection, are also short of cash in the middle of the month. Payday loans are offering them the much needed respite.
2. Payday loans are becoming more popular, in spite of the bad press in recent years and the imposed restrictions.
3. It is not just the poor, blacks, Latinos, and single mothers any more like before. People from other demographic backgrounds are approaching payday lenders now as well. Some observers are feeling that this might, in fact, become a nationwide trend soon. Many people in California and elsewhere in the country are short of cash and finding it difficult to make ends meet.
4. A large section of the population is still un-banked or under banked.
5. Payday loans remain the only practical option for those who need cash in an emergency in the middle of the month. Banks and other conventional lenders won’t issue small dollar loans. Even when they agree, it takes too long to process and approve the loan. In an emergency, people need the cash quickly, which only the payday lenders can provide.
Payday Lenders Are Filling an Important Gap
The Community Financial Services Association has repeatedly stated that payday lending businesses are filling a critical gap. Those in need of urgent cash, those rejected by conventional lenders, and communities that are not being served by banks and credit unions have nowhere to turn to. Payday loans remain the only hope for them.
The implication of doing away with payday lending completely can be catastrophic. Look at the following situations to understand what might happen if these loans are not available to those who need the cash in the middle of the month.
1. A family short of cash and unable to pay the rent can land up on the street.
2. Inability to pay the utility bills may mean no service received.
3. No money to pay the school fees. No education for the kids.
4. No money for medicines. Serious health risk.
5. No money to make car repairs. The person may not be able to go to work and may end up losing the job. This is a very serious situation indeed.
Payday lenders are helping people avoid all these situations by providing them the money they need, and when they need it.
The CFPB Is Protecting Consumer Interest
The Consumer Financial Protection Bureau is a responsible body that investigates the functioning of their member businesses to make sure that they are ethical and complying with all the rules. Rules are framed after detailed research, which includes inputs from the public, industry and consumer roundtables, field hearings, advisory bodies, and small business review panels. Proposed rules are then created. All stakeholders are then invited to comment.
Once the rules are passed, the CFPB actively monitors the businesses to ensure that they are complying.
The CFPB is already doing everything. Surely, there is need for state and federal laws even after this. But these laws need not be as aggressive as many critics want them to be. They have to remember that millions of people in the US depend on their payday loans, without which they will have nowhere else to turn to.
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