New research finds that 90 million consumers are saving $2.2 billion each year. These savings didn’t come from pay raises or bonuses, or new jobs. Instead, these financial gains came when a pernicious form predatory lending became illegal.
Let’s call these locales “shark-free” states, where interest rates on small-dollar payday loans are legally limited to no more than 36 percent. Instead of living on financial tightropes from one payday to the next, these consumers are paying off bills and even saving some money on a regular basis.
Robin Howarth and Delvin Davis, senior researchers with the Center for Responsible Lending (CRL), wrote the policy brief “Shark-Free Waters: States are Better Off without Payday Lending.” They found that consumers in payday-free states have found multiple ways to manage temporary cash shortfalls at a fraction of the cost of payday loans. Their conclusions were informed by a series of academic studies, surveys and focus group results.
Contrary to the claims of industry supporters, consumers are satisfied with the respective state bans. In North Carolina, 9 out of 10 low and moderate-income consumers expressed that payday lending was not in their best interest. “They’re there basically to rob people that need money,” noted one North Carolina consumer.
Consumers of color are especially hard-hit by payday lending’s debt trap. Earlier studies have shown that in states allowing payday lending, such as Florida and California, black and Latino neighborhoods have twice the concentration of payday stores than their white counterparts.
Other states now benefitting from consumer-friendly payday loan reforms are Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. Among these states, 12 also limit interest rates for car-title loans, thereby further boosting consumer savings even further each year.
For example, in New York, the most populous state of the 14 with rate caps, consumers save a total of $789,995, 328 in combined fees for payday and car title loans. Lower but substantial savings were also found in Pennsylvania ($489,497,834), North Carolina ($457,729,960) and New Jersey ($346,587,204).
By contrast, where payday loans remain legal, borrowers pay fees of over $4.1 billion annually, with the average customer taking out 10 loans a year.
“Over the years, CRL’s payday research has focused on the ills of these predatory loans,” said Davis. “This policy brief points out the benefits consumers gained by limiting interest rates – whether by voter referendum or state legislation. Money stayed in their pockets, instead of paying high-cost fees.”
Charlene Crowell is the communications deputy director with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.
