The FTC’s Bureau of Consumer Protection in the United States requires strict restrictions for payday loans (PDL). The restrictions that are supposed to be imposed on the US microfinance institutions are very similar to those that apply to short-term payday loans in other countries in the world. This is a limitation of the maximum number of quick payday loans per year, as well as the period for which a PDL can be issued.
According to research conducted by The PEW Charitable Trusts, on average, Americans have issued loans for a year in excess of the annual turnover of McDonald’s, amounting to about 46 billion US dollars. About 12 million people, without access to other sources of credit, issue payday loans. The maximum amount of a PDL loan is $ 400, which the borrower must repay in two weeks with $ 60 of accrued interest, which is about 300% per annum.
The rates on payday loans are significantly higher than the rates offered by US banks for other types of loans, which leads to the creditworthiness of the population, the emergence of a “debt spiral” when more and more new loans are issued to repay the old ones. According to the new rules, lenders will be allowed to provide PDL loans in the amount of up to $ 500 with small restrictions, but only for those borrowers who do not have other issued cash advance. To issue larger or repeated loans before the previous one is repaid, lenders will have to follow a complex set of underwriting rules in order to be confident in the solvency of borrowers.
Richard Cordray, director of the Federal Agency for Consumer Protection, told reporters that the restrictions are designed to reform the market, in which too often lenders succeed by profiting from the failures of borrowers. Lenders, in turn, claim that they provide life-saving finances to those who need money, and restrictions can lead to the fact that many of the almost 18,000 organizations offering and issuing payday loans will go out of business. Nevertheless, PDL loans are already limited in terms of rates in 15 states of the United States.
How the US lending market develop from the very beginning till nowadays?
In the USA, payday lending services emerged in the late 1980s. To date, microfinance as an activity functions differently throughout the country: in 15 states it is completely prohibited by law, in 9 there are strict restrictions on the level of the interest rate (it ranges from 5% to 11% per year, and the loan amount cannot exceed 30% of the amount of earnings per month). In 27 states, laws are not so strict: payday lenders can issue a maximum loan of $300-$500 for a period of no more than 6 months, while the interest cannot exceed 45% per annum. There are no restrictions in other states.
The average amount of payday loans is $ 375. At the same time, the number of people with such small loans has increased 3 times against the background of the crisis. The US National Consumer Protection Center called on Congress to set a cap on interest rates across the country, but was unsuccessful.
The leadership of individual states has taken measures to reduce the marginal payday loan rate to 36% and below, for example, Nebraska residents voted for such an initiative. Before that, the average rate on small loans in the state was 404%. The largest interest rates are in the state of Texas, which average 664% per year. This is almost 40 times more interest on credit cards (about 16%). The use of digital solutions and mobile applications for oissuing online loans is growing, and representatives of the millennial generation are most actively using them.