are payday loans legitimatePayday loans are hotly contested across the country, and have been for many years. Many states have created their own legislation to try and control predatory payday lenders within their borders, but the advent of online payday loans has made it apparent that regulations at a federal level might be necessary. However, it isn’t just the payday lending industry that is lobbying against stricter regulations. While it might seem like a no-brainer that the majority of government officials would support efforts to reign in predatory payday lending practices, that isn’t completely true, as a group of Republicans and Democrats has proved with proposed legislation that would undermine efforts of the Consumer Financial Protection Board (CFPB) to regulate payday lending.

And it isn’t just lawmakers and lenders who have opinions on payday loans: the consumers who use them have valid thoughts, as well. According to research by polling firms Global Strategy Group and Tarrance Group, many borrowers who use payday loans are just fine with how things currently are. This brings up a question that many might not have considered before: whose opinion matters more when it comes to payday loans — the consumers who use them or the government officials tasked to protect them?

The federal government is battling against itself

As anyone who’s ever been exposed to any element of the government can attest, it’s rare for there to be complete and total agreement on any issue between parties or individuals. Efforts by the current administration to protect consumers from predatory payday lenders have been combated by members on both sides of the party line. Much of the issue boils down to the CFPB and how much power it wields.

What is the CFPB and what does it do?

Established in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is a government bureau that aims to protect consumers by helping to create and enforce rules for financial marketplaces. It also supervises businesses within this industry, such as banks, credit unions and payday lenders. Proposed reforms of the payday loan industry have been at the top of the CFPB’s priority list, and it has steadily taken action when and where it can. However, many of its currently proposed new regulations are under fire by both those who support payday lenders as well as those who oppose them. It’s important to point out that the CFPB does not have the power to ban payday loans completely or regulate interest rates across the board. What it can do is set conditions that lenders must satisfy in order to provide safe loans to consumers.

What regulations are the CFPB proposing?

Although the specific rules are still being drafted, the focus will be to ensure that lenders don’t offer high-interest loans to people who are unable to make the payments. At present, most would-be borrowers can qualify instantly for a payday loan, and they wind up getting stuck with high interest and fees which they can’t feasibly pay on such short terms as two weeks or 30 days. The CFPB is seeking to create a level playing field that holds lenders accountable and upholds industry underwriting standards. Some think the regulations proposed by the CFPB aren’t strong enough — but others think they are too demanding and have created legislation to oppose them.

Who is opposing these regulations?

A group of lawmakers that is made up of both Republicans and Democrats is attempting to fight the CFPB with a bill called the Consumer Protection and Choice Act, and it has gained notoriety due to cosponsorship from Debbie Wasserman Schulz, who is a Florida Representative as well as the Chairwoman of the Democratic National Convention. This would undermine the efforts of the CFPB to curb predatory lending. Some of the ways it would do this include delaying the federal requirements by two years as well as allowing states to adopt more lenient regulations. The main focus of the bill is not necessarily on payday loan regulation, but on the desire to curb the power of the CFPB, which proponents of the bill say is too

So what about the people who actually use the loans?

While the government, financial industry members and nonprofit watchdog groups have an awful lot to say about payday loans, it’s also pertinent to take into consideration the thoughts and needs of the consumers who actually use them. One of the more prominent resources for data about payday loans in America is the Pew Charitable Trust, which has been studying this topic for five years. It determined that approximately 12 million people take out payday loans every year, and they end up paying more than $7 billion in fees. The average borrower pays $520 in fees to borrow $375, averaging $55 in fees every two weeks at brick-and-mortar loan services. There are 36 states in the U.S. that allow payday loans without strict regulations, and the average annual interest rate for those states is a whopping 391%.

Who are the people who take out these loans? Usually, they are low income and are not ideal bank customers due to unstable or low income. Payday loans and other similar small-dollar loan products are often their only option. According to Pew’s research, 58% of payday loan customers have trouble meeting their expenses, and most can only afford to pay 5% or less of their payday loan on the due date — rather than the lump sum payment that is typically required. Since borrowers can rarely afford to pay the lump sum, many take out additional loans or roll over their initial loan to cover the costs. This adds more fees and traps them in a loop known as the payday loan debt cycle; as Pew discovered, the average borrower takes five months to get out of debt once they begin using a payday lender.

Payday loans legitimate — and necessary — to those who have no other option

New research by two top polling firms, one Democratic and one Republican, shows the disparity between those who are voting and making the decisions about payday lending and those who actually use payday loans. Data compiled by Global Strategy Group and the Terrance Group determined that the overwhelming majority of payday loan borrowers polled (96%) understand the financial burden of the loans they take out and consider the loans to have been useful to them. That’s because, for 74% of them, there are no other options during a financial crisis — while non-payday loan borrowers surveyed said they would borrow money from a friend or family member in a time of need, 40% of payday loan borrowers indicated they’d use a payday loan.

Many people take for granted the ability to use banks or rely on others, but if every other door is closed, then most people would take the only option left. It is necessary that lawmakers and voters consider the financial needs of those their decisions will impact most. Some of the concern when it comes to the CFPB cracking down on the industry is related to worries of what those who use payday loans to get by would do if the entire industry shut down.

Bottom line: reform is necessary, but needs to be done carefully

The question of whether or not payday loans are legitimate is a hard one with no black-and-white answer. Payday loans are legitimate to those who need them, offering credit where it can’t be accessed anywhere else, but the industry is also clearly problematic and a lack of overall regulations nationwide means the residents of some states are more apt than others to get trapped in the debt cycle. Until the CFPB’s proposed regulations are finalized and action is taken, only time will tell what will happen to payday loans and their customers. Want to learn more about personal finance? Follow our blog to stay informed.