Imagine a world without payday loans. The familiar neon signs advertising ‘Fast Cash’ are absent from the landscape of low-income areas, and no lender is permitted to extract interest rates of 400 percent or more. This was the reality in most parts of the United States until the 1990s, when the deregulation of the financial sector led to the proliferation of payday lending.
The Pre-Payday Loan Era
Until the 1990s, most of the United States was essentially payday-loan-free. This was due to stringent usury laws that capped the interest rates on loans. This region, home to about 90 million Americans or one-third of the U.S. population, was fondly referred to as PaydayFreeLandia.
The Post-Payday Loan Era
With the advent of financial deregulation and changes to state usury laws, the payday lending industry began to proliferate. Today, 14 states and the District of Columbia are essentially payday-loan-free, thanks to strong usury laws.
The Benefits of Banning Payday Loans
The benefits of residing in PaydayFreeLandia are vast. New Yorkers, for instance, save nearly $790 million each year that would otherwise go to payday lenders in fees. Across all payday-loan-free states, annual savings exceed $3.5 billion.
The Case Study of North Carolina
In 2006, North Carolina made history by becoming the first state to rid itself of payday lending after initially legalizing it. In a similar vein, Arizona and Montana allowed payday lenders to operate for years until voters had the opportunity to oust them at the polls.
The Myth of Payday Lending
There is a persistent myth that payday lending is a necessary evil and that it merely needs to be less predatory. This notion is contradicted by ex-borrowers of payday loans themselves, who report being better off after their states eliminated these debt traps.
The Role of the Federal Government
The federal government enacted a nationwide interest rate cap of 36 percent for military personnel and their families after determining that predatory lending was harming borrowers and even undermining military readiness.
The Role of Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) is finalizing a federal rule on payday loans. While the CFPB lacks jurisdiction to set a federal usury cap, it is expected to use its full authority to issue a strong final rule that ends abusive payday lending once and for all.
The Role of Legislators
Legislators also need to be proactive. Sound public policy would bolster and expand responsible lending by community development financial institutions. Moreover, living wage laws and other measures are needed to address the root causes of economic insecurity and inequality.
The Stakes Are High
The stakes are particularly high for low-income families in states where payday lending is currently unchecked, but also for the 90 million people who live in PaydayFreeLandia. A weak CFPB rule could embolden industry actors seeking to break into payday-loan-free states.
In conclusion, the experience of payday lending in the United States has proved to be a costly failure. It’s time to hit the reset button. Long live PaydayFreeLandia.
