Payday lending businesses are issuing more money than ever before -- about $27 billion a year, the Center for Responsible Lending (CRL) estimates.
The industry began in the early 1990s with a few hundred storefronts that have now mushroomed into roughly 22,000 locations, according to CRL. The loans require consumers to pay a flat fee to borrow against their next paycheck. Research by the Pew Charitable Trusts has found that short-term loans can eat up 36 percent of a paycheck, and lawmakers are debating whether to bring these lenders under stricter oversight. The Consumer Financial Protection Bureau argues that the industry traps many borrowers in a debt cycle in which they pay more in fees than the loan amount. Fifteen states offer caps on fees at an annualized interest rate of 36 percent, but none of those states have payday lenders. Four out of five payday loans are renewed within 14 days, which earns payday lenders some $2.6 billion a year, according to CRL.
Many payday borrowers are considered "underbanked" because while they have checking or savings accounts, they do not use formal credit. Some of these consumers are trapped in a catch-22 where they are unable to secure formal loans because they have no history of repaying them but are unable to create a pattern of loan repayment because they cannot get credit in the first place. One idea circulating is to allow underbanked consumers to use rental and utility payments to build their credit scores and then allow them access to formal credit where interest rates are better regulated. This idea, however, has made little progress.