Payday Lending: How Does Legal Sharking Look Like in 2016?

The financial world has its own sharks that operate perfectly within the confines of law. However, they wouldn’t be sharks if there weren’t negatively affected parties—in particular, customers. Payday lenders are one of those parts of the financial services industry that have been unintentionally (or intentionally) legally sharking the ones with no other choice than alternative sources of financing rather than banks.

Payday loans are usually given at rates around 15%. Unfortunately, it’s not the only expense involved and they tend to add up to quite a big sum—a 15% rate (or a $15 fee) on a two-week $100 loan results in 390% APR. The $15 example is a democratic one as fees can be higher on payday loans.

Payday lending business has reached a massive scale in the US. In fact, around 12 million people in the US borrow close to $50 billion every year. The craziest part is that $7 billion are spent on interest and fees. About 50% of online borrowers are reported to have at least one debit attempt that overdrafts or fails, which results in an average of $185 in bank penalty fees, in addition to any fees the lender might charge for failed debit attempts.

The vast system of payday lenders has scattered across the country to sustain the $50-billion-dollar industry. According to some estimations, there is an ecosystem of around 16,000 payday loan stores across the country. In addition to these, there are online platforms to serve the ones in need.

James Speer, an attorney and Executive Director of the Virginia Poverty Law Center, has shared his insights on the problem of payday loans, saying, "The No. 1 problem with payday loans is they're unaffordable. They're really not even loans at all—it's just a way of sucking people into what we call a debt trap. It's more like loan-sharking."

The industry grew so strong and "arrogant" with APRs of 390% that the governmental structures started paying attention. The Consumer Financial Protection Bureau recently called the federal government to pay extra attention to the payday lending industry and expressed unveiled negative attitude towards the predatory behavior of payday lenders.

CFPB has expresses the same concern as Mr. Speer, emphasizing the hazards of debt traps. According to some estimations and research, the average payday loan results in a $430 repayment, eating up almost 40% of the borrower’s gross paycheck. It's eight times more than the average consumer can actually afford to repay. Hence, the consumers have no other choice than take another loan. In fact, CFPB suggests that 80% of borrowers take three loans within two weeks after they have repaid their first loan. The "infinite" loop goes on till the statistics show an average of 11 payday loans a year within the payday lender customer base.

We are writing in support of strong, effective rules governing payday loans. The Consumer Financial Protection Bureau (CFPB) has a responsibility to protect consumers from these predatory and exploitive financial products, and we urge you to implement rules that would prohibit fraudulent and abusive payday loans that threaten the economic well-being of so many Americans, especially those from low-income communities of color, said CFPB in the letter.

Closer to summer, the CFPB will be proposing new standards for payday lending regulation. The governmental structures will need to work hard on reaching the right balance between consumer protection and the possibility of cutting off maybe the only source of temporary financing. However, since more than 70% of consumers believe payday lenders need to be tamed, stricter regulation would most likely find public support.

Even the White House has expressed a concern and existing necessity to tighten the screws on payday lending industry. Little more than a week ago, the Obama Administration published a letter, which said that they, have a moral obligation as a country to do something to stop payday lenders from preying on consumers by trapping them in an endless cycle of debt."