payday loansUpdated: March 21, 2016

Most people are aware that payday loans aren’t the most financially sound solution for taking care of everyday money problems, but that doesn’t stop millions of Americans from using these services on a daily basis. The numbers are almost unbelievable, as Alabama recently found out when its Banking Department set out to create a statewide database that would collection the necessary information to prevent borrowers from taking more than $500 in payday loans at a time. The information collection began in August, and 10 weeks later the results came in — and they were deeply disturbing. In that short amount of time, Alabama residents took out 462,209 loans (approximately 46,000 loans per week) to the tune of $146 million, and are predicted to borrow a total of 2.4 million loans in the next year if those numbers continue.

While the numbers are certainly surprising, Alabama is above average when it comes to payday loan borrowing — other states with similar databases, such as South Carolina, have reported lower numbers (South Carolina residents took out about 1 million payday loans in 2013). And what’s more, it seems that the efforts being made are having an effect on the payday loan industry, as businesses shutter their doors and repeat customers are blocked from taking out more loans by programs like Alabama’s. As the tide begins to turn against an industry that is known for trapping its customers in a debt cycle, we look ahead to see what the future has in store for payday loans.

Crackdowns across the country

The numbers are certainly sobering, and with everyone from the President to television personalities weighing in on the problem America has with payday lending, it’s definitely time for something to be done. Efforts are being made recently on both a federal and state level to enact changes that will regulate the payday loan industry to protect customers from predatory lending practices — as well as themselves. On a federal level, the government has been getting more aggressive in part thanks to actions taken in recent months lead by the Federal Consumer Protection Bureau (FCPB). Some of the most important recent victories include:

Proposal to ban arbitration clauses. In early October 2015, the CFPB announced it was considering a proposal to ban the use of arbitration clauses by consumer financial companies. These clauses essentially revoke the right of a customer to take legal action against a company, serving as a free pass that lets them avoid accountability. While most individuals won’t go to court on their own against a financial service provider, large numbers of customers can band together to file a class-action lawsuit when they’re eligible — and millions are. However, arbitration clauses prevent people from participating in a class-action lawsuit, something the FCPB has determined is a violation of customers’ rights to have their day in court.

Closing a major loophole in the Military Lending Act. As many as one in 10 active-duty service members are targeted by lenders for high-cost credit options, such as payday loans. Passed in 2006, the Military Lending Act was intended to prevent predatory lending to service members by placing a 36% interest cap on certain types of consumer loans; however, a loophole that allowed “open-end” credit options to charge higher rates was abused by many lenders to get around the interest cap. The Department of Justice and Obama administration expanded the Military Lending Act in July 2015 to close this loophole, which is a definite win for a segment of the population that struggles immensely with the payday loan debt cycle.

On a local level, states have been placing restrictions on both brick-and-mortar lenders as well as online payday loan services to try and crack down on predatory lending practices. Although the industry has fought back hard against these regulations, in states like Alabama, it’s been a losing battle. Still, there’s a long way to go and online lending presents added problems that the more traditional physical branch locations don’t (such as a greater risk for identity theft and fraud).

Payday loans fill a financial gap

While interest rates can skyrocket on payday loans, the biggest problem faced by lenders comes when an existing loan is renewed, usually more than once. That’s where the cycle begins, when fees and interest pile up and trap borrowers in a place where they have long since paid off the amount they originally borrowed by are still crippled by what remains. Although many people would say the best solution is for payday loan services to disappear altogether, the problem is that they serve a purpose for the millions of Americans who use them each year. A significant amount of the people who use payday loans are those who do not quality for traditional banking or credit union services. In order for predatory payday lending — or all payday lending, since some would consider the entire industry to be corrupt — to be eradicated, something needs to take its place and meet the financial needs of the consumers who are using them. Otherwise, people will be left potentially worse off than they were before.

So what are the potential solutions?

Beyond the simple crackdown on predatory practices, a number of other solutions have been offered in recent years — some more feasible than others. Certainly, placing limitations that keep lenders responsible while also preventing borrowers from racking up too much debt at once can certainly go a long way.

Other potential solutions involve reinventing the entire system. Presidential candidate Bernie Sanders recently endorsed an idea put forth in January 2014 by the Office of the Inspector General of the United States Post Office to allow post offices to provide non-bank financial services to local populations. Suggested potential services in the report include bill payment, money orders and small-dollar loans. Considering one in four U.S. households lives at least partially outside of the financial mainstream, either by not having a bank account or in some other way, there is obviously a need for another solution to the financial needs of that population.

It’s not just the government that’s trying to solve the problem; private companies, such as Target, have also been working on coming up with answers to the payday loan conundrum. Target recently worked on an idea to reimagine payday lending into a more ethical, socially responsible system. Ultimately, this idea was abandoned, but who’s to say another mainstream corporation couldn’t pick it up? Palo Alto-based startup Activehours created an app that allows users to access their paycheck anytime they wanted, allowing people to borrow against themselves for no cost — though monetary tips are suggested.

Unfortunately, the downfall of Activehours’ design is in the limitations it places on who can successfully use its service — those without a bank account, salaried workers and people who get paid in any method other than direct deposit are locked out. It’s a good effort, but there’s still a long way to go before a real solution that works for the entire population feeding the payday loan industry is found.

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