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Pew report

Pew report

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Published by Stan Diel
Pew report
Pew report

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Published by: Stan Diel on Oct 30, 2013
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10/30/2013

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A report from
Oct 2013
Payday Lending in America:
Policy Solutions
Report 3 in the
Payday Lending in America
 series
 
The Pew Charitable Trusts
Susan K. Urahn,
executive vice president
 Travis Plunkett,
senior director 
Nick Bourke Alex Horowitz Walter Lake Tara Roche
External Reviewers
The report benefited from the insights and expertise of five external reviewers: Glenn Firebaugh, professor of sociology and demography, The Pennsylvania State University; Timothy Guinnane, professor of economic history, Yale University; Mike Mokrzycki, independent survey research expert; Alan M. White, professor of law at the City University of New York; and Lauren E. Willis, professor of law, Loyola Law School (Los Angeles). Although they have reviewed the report, neither they nor their organizations necessarily endorse its findings or conclusions.
Acknowledgments
The small-dollar loans project team thanks Jo Ann Barefoot, Corrine Fowler, Arvind Ganesan, Rich Jones, Alex Kaufman, Michael Roster, and the many Colorado state officials, researchers, consumer advocates, lenders, policymakers, and other experts who were so generous with their time, knowledge, and expertise. Finally, we would like to thank the small-dollar loan borrowers who participated in our survey and focus groups, and the many people who helped us put those groups together.
The Pew Charitable Trusts
 is driven by the power of knowledge to solve today’s most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life.
Cover photos: 1.
 Dornveek Markkstyrn
2.
 Jamie Grill
3.
Getty Images
123
For further information, please visit:
 
About the
 Payday Lending in America
 series
The following report is the third in a series on payday lending. The first two reports detailed fundamental problems with the loans, which are due in full on the borrower’s next payday. In reality, however, the loans’ ultimate cost and duration bear little resemblance to advertised terms. This wide gap between the loans’ packaging and borrowers’ experience is endemic with lump-sum repayment payday loans. That research showed that those who take out short-term, small-dollar loans routinely struggle to keep up with living expenses. Most often, they use the loans to pay rent, utility bills, and other routine obligations (as opposed to spreading the cost of purchases over time, which is a more traditional use of credit). Repeat borrowing is the norm, because customers usually cannot afford to pay the loans off on payday and cover their other expenses, so they repeatedly pay fees to renew or reborrow the money for an average of five months of the year.Lenders depend on this repeat borrowing, because they would not earn enough revenue to stay in business if the average customer paid off the loan within a few weeks. They offer these loans to almost anyone with a checking account and a source of income—without assessing the borrower’s ability to repay the loan—in exchange for the right to take full repayment directly from the borrower’s checking account on his or her next payday. This ability to collect payment before the customer pays other bills, such as rent or utilities, is unique to payday lenders, and it allows them to thrive even as they make loans to borrowers who cannot afford them. This report discusses an alternative small-dollar loan product: one repaid in affordable installments over time. This type of loan was ubiquitous in the United States for most of the 20th century. Beginning in the early 1990s, new state laws allowed for today’s payday loans, on which a lump-sum payment is due in full on the borrower’s next payday. Pew’s research examines a 2010 law change in Colorado that alters this paradigm. Colorado’s unique six-month installment loan includes a variety of carefully designed protections, works better for consumers than a lump-sum payday loan, and is viable for lenders. These conclusions are buttressed by extensive nationwide research that provides guidance on making the small-dollar loan marketplace more safe, transparent, and predictable, as well as opinion research on how consumers want to see it change.

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