20.6% of high earners among those potentially affected by changes to short-term lending
You might think you have an idea of who’s likely to take on a payday loan: perhaps those without bank accounts, too low-income for savings. But unless you’ve ever needed one, you wouldn’t know you typically need a paycheck to borrow against. And a bank account to accept your loan funds.
On Thursday October 5, 2017, after five years of arguing and research among the lending community and Congress, the Consumer Financial Protection Bureau finalized a rule preventing rollover charges and refinancing on short-term loans — including auto title loans, deposit advances and longer-term balloon loans.
The government agency’s proposal promises to make it harder for borrowers to get caught in a predatory debt spiral that can end up in bankruptcy for America’s most disenfranchised.
But it’s not always clear who these short-term borrowers are. Just who could the CFPB’s sweeping changes affect most?
The reality of payday and pawnshop lending
Conducted by global research provider Pureprofile, a recent finder.com study of more than 2,000 Americans reveals an estimated 35 million Americans (14%) would turn to a short-term loan in a financial pinch over borrowing through credit cards, personal loans or even friends and family.
Of these potential borrowers, 29.9% earn up to $50,000 a year. More surprisingly, of those who’d turn to a payday loan for a bit of financial breathing room, 20.6% pull down six-figure earnings — or more than $100,000 annually.
|Household income||Proportion of those turning to a payday loan by household income|
Who the CFPB’s rules come down on hardest
Breaking down the findings, slightly more women (14.3%) than men (12.9%) would choose short-term lending if their financial situation called for it.
As the CFPB tightens its regulatory grip on the payday financing industry, it threatens to further restrict the most vulnerable among us from accessing short-term cash: women ages 35 to 54 earning less than $50,000.
Payday loans by generation and state
The likelihood of relying on a payday loan is stronger for Generation Y — those born in the 1980s and 1990s — with 15.6% saying they’d look to one to bridge a financial gap, closely followed by Gen X (14.7%). Baby boomers trail further behind (8.0%).
The CFPB’s rule promises to “put a stop to the payday debt traps that have plagued communities across the country,” says bureau director Richard Cordray. According to our study, those living in Ohio could feel the hardest blow: 20.4% of Buckeye State residents say they’re likely to turn to payday loans in a financial hardship, with California (19.7%), Texas (16.8%) Virginia (14.6%) and Indiana (14.0%) on its heels.
|State||Proportion of those turning to a payday loan (%)|
What’s there for a borrower to do?
These changes won’t go into effect for some time: The CFPB must first publish its rule in the Federal Register, followed by a 21-month public disclosure period. But once it becomes law, all lenders who regularly extend credit are subject to the CFPB’s requirements for loans covered by the rule — online and storefront banks, credit unions and nontraditional lenders among them.
Prepare for yet more payday pronouncements from the federal government before you hear the last word.