The Consumer Financial Protection Bureau recently finalized a new rule governing the underwriting of certain short-term loans, notably payday loans. These loans are most frequently provided by local payday lenders, often at extremely high interest rates with short repayment periods, making it difficult for low-income consumers to meet basic needs and repay payday loans without taking out repeat loans and incurring even higher lending costs. The rule aims to reduce consumer indebtedness cycles by requiring lenders to assess borrowers’ ability to repay, limiting recurring loans, and implementing stronger credit reporting requirements. Despite ongoing objections to the rule from industry players and government officials, this new rule highlights an opportunity for financial institutions to develop more robust short-term lending options for these underbanked consumers, providing not only lower-cost credit in the near term but also the potential to develop longer-term banking relationships and positive credit histories.
Key questions discussed in this report:
- What is the current state of the payday lending market?
- What role do payday loans play in the financial lives of consumers, especially the underbanked?
- How have recent regulatory actions affected the short-term lending space?
- What opportunities exist for financial institutions entering the short-term lending market?
Companies Mentioned: eCredable, Elevate, Experian, Microbilt
Consumer data in this report is based primarily on information collected in a panel of 10,768 consumers in an online survey conducted in July 2017. The margin of sampling error is ± 0.94% at the 95% confidence level.