Events / Products & Services / Strategy / Aug 18 '16

Payday Lending, by the (Shocking) Numbers

Adam Lee
Adam Lee
Incubator Director

Payday lending is a burden on consumers, especially the most vulnerable members of our society. Many consumers who take these loans end up taking out an additional payday loan just to pay back the first leading to an endless debt cycle that make the situation worse and worse. 

Take a look at 3 shocking ways these loans are having an impact on our communities. If you don't like the numbers, do something about it. There are many successful payday alternative programs in place today in financial institutions across the country. Are you satisfied with the solutions your credit union is offering?

We invite you to participate in two such programs in our Incubator program.

Adam Lee
Adam Lee
Incubator Director

**Sign up to test an incubator program by 9/15**

That’s no hyperbole. These numbers are indeed shocking. Let’s cut to the chase—here are 3 different views on the impact of payday lending. Any way you slice or dice it, this dish leaves a bitter taste:

  • If it were a country, the "Empire of Payday Lending" would be the 104th largest economy in the world.*
  • As you read these words, every 90 seconds, $67,000 in payday debt is issued.**
  • According to Wisconsin state statute, the maximum finance charge and APR for a 14-day, $100 loan is…wait for it…limitless.***

Let that sink in, but stick with me for a minute if you want to discover solutions to what can often feel only like problems within our financial systems.

Payday lending is a burden on consumers, especially the most vulnerable members of our society. Many consumers who take these loans end up taking out an additional payday loan just to pay back the first leading to an endless debt cycle that make the situation worse and worse.

But it doesn’t need to be so. Many credit unions sit somewhere on the continuum of good to great in the fight to increase awareness and education, provide access to better options and help members get on their feet and out of stifling debt. There are many successful payday alternative programs in place today in financial institutions across the country. Are you satisfied with the solutions your credit union is offering?

Let’s cut to the chase again: Filene invites you to participate in Payday Payoff Installment Loans. Learn more below and get started now.

*Payday Lending is the 104th Largest Economy in the World

The Consumer Finance Protection Bureau cites multiple estimates on the size of the payday lending industry ranging from $23.6 billion to $30 billion in new loans generated per year. Let’s be conservative and use the low end of that range: $23.6 billion, that’s with a capital “B”illion.

To put that in perspective, here is a sample of 2015 GDPs as reported by the World Bank:

National GDP 2015

NationRankGDP (millions of U.S. dollars)
United States1$17,946,996
Switzerland19$664,738
Latvia102$27,035
Uganda103$26,396
Estonia105$22,691
Tuvalu195 (last)$38

With a GDP of that size, payday lending could essentially become its own empire. It would be the 104th largest economy in the world, more than 91 other nations. How do you feel about an industry many would consider as unsavory being the 104th largest economy in the world?

**Every Tick of the Clock, Another $748 in Debt

Let’s look at this another way by breaking down the $23.6 billion into different time segments:

TimeframeNew Loans Issued
Annual$23,600,000,000
Monthly$1,966,666,667
Weekly$453,846,154
Daily$64,657,534
Hourly$2,694,064
Per Minute$44,901
Per Second$748

By the time it’s taken you to read this far in the blog (90 seconds), roughly $67,000 in new payday debt has been issued to consumers. How much of this $67,000 are consumers going to be able to pay back in the near future?

***The Limitless Cost to My Community (and Yours)

While these loans may meet people’s immediate needs, the fees represent a tremendous opportunity cost. Annual percentage rate (APR) equivalents exceeding 100%, 200%, 400%, or even higher, ensure that while one need is met, another need is often created, especially for those living paycheck to paycheck. When new payday loans are taken to pay the original loans, the costs quickly grow out of control.

Speaking of out of control, in my home state of Wisconsin, there are no meaningful limits on payday lending: 

Maximum Loan AmountLesser of $1,500 including fees or 35% of gross monthly income
Loan Term90 days or less
Maximum Finance Rate and FeesNo Limit
Finance Charge for 14-day $100 loanNo Limit
APR for 14-day $100 loanNo Limit

Let’s say someone in my community encounters an unexpected financial emergency and needs $1,500 quickly. Visiting a payday loan store, he or she can quickly get the needed $1,500 but along with it comes a $20 charge for every $100, which must be paid back in 14 days (this is roughly an APR equivalent of 520%, a very realistic scenario for Wisconsin).

So what? If that individual could have borrowed money from a friend, family member, or from their local credit union (we’ll get to this in a moment), he or she could have saved some of the $150 per week in fees over the course of the 14-day repayment term. What could a financially vulnerable family of four do with $150 per week? According to the U.S. Department of Agriculture, the cost to feed a family of four a healthy diet on a low cost food plan is $146 per week. Do you believe it is fair to ask a family of four to choose between meeting an emergency expense and buying a healthy diet for a week?

Don’t Like These Numbers? Offer Something Better

We could place blame on the payday lenders. We could also place blame on the regulators. Time after time when new regulations pop-up, lenders often find new ways around the regulations. Then what? Financial institutions don’t have to wait for payday lenders to disappear or regulations to improve. My challenge: instead offer a better product, at a fairer price, with the consumer in mind. Sound familiar? It does to me. This sounds like the credit union movement. Even if payday stores disappeared, the consumer need for short term credit does not. Credit unions are in a unique position to beat payday stores at their own game, meet a huge consumer need, run a financially sustainable program, all without putting vulnerable populations into greater debt.

Need a Place to Start? Test with Filene

Filene Research Institute is helping credit unions find something better. Reject the myth that there are no good payday alternatives out there or that alternatives can’t be financially sustainable. The trick is finding the right program that fits with the credit union’s capabilities and its members’ needs.

Contact me to learn more about Payday Payoff Installment Loans. We need your help to understand if this program is scalable, financially sustainable, and impactful, enabling credit unions to make the widest possible difference.

Payday lending does not have to be the 104th largest economy in the world, or cost a family a week’s worth of groceries. Help create some positive numbers by signing up for one of our Incubator Programs.