More Evidence That Americans Want Payday Loans Regulated, and In Certain Ways

Payday loans are short-term loans that generally must be paid on the borrower’s next payday–typically, two weeks. These loans carry a fee of around $15 for every $100, payable at the end of those two weeks. But most borrowers are unable to pay within two weeks. Instead, they roll the loans over, sometimes multiple times, making these “small dollar loans” much more expensive, and APR a better gauge of actual borrowing cost. According to the Consumer Financial Protection Bureau (CFPB), the typical two-week payday loan carries an APR of 400%. In response to the inability of borrowers to pay such high interest rates, some states have regulated these types of law, and the CFPB has proposed rules to regulate payday and auto title loans. For instance, New Mexico’s governor recently signed a bill that outlaws small dollar loans with terms less than 120 days and caps interest rates on small dollar loans at 175%.

In light of the national attention that payday loans continue to receive, what does the American public think about them and various proposed reforms? Last week, Pew Charitable Trusts released the results of its recent survey of 1,205 American adults that aimed to assess public sentiment about proposed reforms. Highlights of the study include three key findings.

First, 70% of respondents indicated that they think payday loans should be more regulated. Second, in determining whether a loan is effective, respondents focused on the pricing of the loan, rather than the process by which the loan was issued–that is, interest and fees versus whether the borrower’s credit report is pulled. Finally, third, 70% of respondents wanted to see banks offer small dollar loans to people with poor credit, so much so that 70% of respondents indicated they would view banks more favorably if they offered small dollar, lower-cost loans. And lower-cost does not mean loan. Lower-cost includes a $400 loan, due in three months, for a $60 fee.

This finding comports with respondents answer to another question about banks offering an alternative to payday loans. 75% of respondents indicated that it would be a “good thing” if banks offered small dollar loans with APRs higher than credit cards, but lower than current payday loans. Overall, this new survey’s findings should be kept in mind as states and the CFPB continue shaping payday loan regulations.

Can You Believe That Free Credit Score?

As reported by the Washington Post, the only credit score that matters is the one that lenders use to evaluate customers. And, importantly, that score might not match the “random” scores customers received from their credit card companies or free websites, such as Experian, Equifax, and TranUnion. Although those scores may be interesting, they ultimately have little bearing on the interest rate a customer is quoted, or when a customer’s application will be approved. This is because lenders use different models to calculate a customer’s credit score than Experian or credit card companies. And, perhaps not surprisingly, lenders’ models tend to calculate lower credit scores for customers than customers found online.

In short, don’t rely on the free credit scores you receive, or even those you pay for, to assess your ability to pay for the mortgage or car loan you are considering. Instead, build in a cushion. What lenders use may vary markedly from the credit score you used to benchmark loan payments, resulting in monthly payments $100 or more higher than anticipated. But, importantly, if the credit score your lender uses seems unduly low as compared to the score given to you by your credit card company, inquiry with your lender about it by asking what model is being used to generate your score.

Welcome to Guest Blogger Professor Pamela Foohey!

I would like to welcome Professor Pamela Foohey as a blogger to this site!  I am so very pleased to have her on board, to share her insights and research.  Professor Foohey teaches at Indiana University Maurer School of Law in Bloomington, Indiana, where her research centers on bankruptcy, commercial law, and consumer law. She has become a pioneer in her empirical studies of bankruptcy and related parts of the legal system, combining quantitative and qualitative, interview-based research. Her work in business bankruptcy focuses on non-profit entities, with a particular emphasis on how churches and other religious organizations use bankruptcy. The results of this research have been featured in media outlets such as the New York Times, Bloomberg, CBS News Moneywatch, and Reveal. Professor Foohey also is a co-investigator on the Consumer Bankruptcy Project, a long-term research project studying persons who file bankruptcy which has been the leading empirical study of consumer bankruptcy for the past 35 years.

Welcome to Professor Foohey!


Getting Car Insurance? Your Zip Code Matters

First, many thanks to Amy Schmitz for inviting me to guest blog on My Consumer Tips. I’m excited to share some of the consumer credit issues I’ve happened upon during my work. My research includes empirical studies of bankruptcy and consumer credit. (Read more about me here.) Along with my co-authors on some articles, I’ve written about racially disparate uses of consumer bankruptcy by families and business bankruptcy by churches. This research is part of a growing body of research finding that lower-income individuals and minorities pay more for goods and services and, on average, receive less. This week, ProPublica and Consumer Reports published a new study that adds auto insurance to the list of services for which minorities pay more.

Although I blogged about the study briefly over at Credit Slips, I want to spend more time discussing the findings here. The study analyzes car insurance premiums and payouts by zip code in four states, California, Illinois, Texas, and Missouri. It finds that major insurers charge up to 30 percent more for insurance in minority neighborhoods than white neighborhoods with the same risk (meaning with similar accident costs). To put some numbers to this finding, the report begins with the stories of Nash and Hedges. Nash lives in a neighborhood in Chicago that from a car insurance perspective is safer than the Chicago neighborhood where Hedges lives. Nash’s neighborhood is predominately minority, while Hedge’s neighborhood is predominately white. Nash is 26 and drives a 2012 Honda Civic LX. Hedges is 34 and drives an Audi Q5 Quattro SUV. Both Nash and Hedges are employed and both receive a good driver discount. Who pays more for car insurance?

If you guessed Nash, you’re right. But what is more interesting and perhaps unexpected is how much more Nash pays. He pays $191 a month. Hedges pays $55, almost four times less than Nash. Why does this matter? Nash’s story includes struggling to make that hefty monthly payment while support his wife and daughter by working two jobs. An extra $140 a month would go a long way to easing Norm’s mind about making ends meet.

Moving beyond these two stories, the study confirms what some consumer advocates have suspected for years: That auto insurers seem to be using zip code as a proxy for race, and charging minority neighborhoods more for insurance, despite the fact that these drivers are just as safer as drivers in white neighborhoods and despite the fact that cars “residing” in these neighborhoods are no more likely to cost insurers more in payouts than cars in other neighborhoods. Consumer advocates’ assumptions about auto insurance were based on prior knowledge that where someone lives matters to economic opportunity and mobility. Auto insurance premiums now can be added to the list of the ways in which lower-income individuals and minorities pay more, and which hinder their efforts to save and achieve economic security. Read the full study here.