Washington, DC – Today, Consumer Federation of America and Woodstock Institute published a report detailing alternatives to high cost loans and policy solutions to expand affordable options. The report provides an overview and analysis of the many alternative products and strategies employed by consumers when high cost credit is unavailable, and spotlights initiatives, products, and resources implemented and available from throughout the country.
“In states that have capped rates and protected their consumers from predatory lending, consumers employ a variety of strategies to grapple with the chronic gap between growing expenses and stagnating wages and wealth,” said Rachel Gittleman, CFA’s Financial Services Outreach Manager. “This report provides a helpful tool for legislators, advocates, and organizations working to identify safe, affordable alternatives to high cost loans.”
“We are in the midst of an era where more products and more companies are responding to the need for quick, small-dollar loans,” said Horacio Mendez, President & CEO of Woodstock Institute. “Gone are the days where triple-digit interest rate loans were a consumer’s only option.”
Although payday and high cost lenders market their loans to assist borrowers with financial emergencies, 69 percent of payday loan borrowers use these loans to cover recurring living expenses. The gap between income and expenses cannot be solved by credit alone, as it is the consequence of many contributing factors, including increasing inequality, stagnating wages, and the rising costs of common goods.
Given the persistent harms of high cost loans, a growing number of states have capped rates. For small loans, 36 percent is the dividing line between whether borrowers have a decent chance of affording payments, though states tend to impose lower rate caps for larger loans.
In states that have capped rates, consumers have been able to look to other financial strategies and other forms of small dollar credit when faced with budget shortfalls. Beyond additional sources of credit, 81 percent of payday loan borrowers said they would cut back on expenses when asked what they would do if faced with a cash shortfall and payday loans were unavailable. Woodstock also commissioned a poll this year that showed consumers employed a variety of strategies to address emergency cash needs. The top three strategies were (1) credit card (24%), (2) tapping into personal savings (23%), and (3) borrowing money or getting assistance from a church, charity, friends, or family (21%). In addition, new affordable lenders are moving into Illinois. As of mid-November of this year, the state has granted 168 new lending licenses since the 36% rate cap took effect. (Data provided pursuant to FOIA request.)
Alternatives discussed in the report will provide both resources for an individuals’ immediate budget shortfall and strategies for planning ahead for the next emergency.
Contact: Rachel Gittleman, 609-571-5953