Payday Loans Cost 4 Times More in States With Few Consumer Protections

Overview

Since 2010, four states—Colorado, Hawaii, Ohio, and Virginia—have passed comprehensive payday loan reforms, saving consumers millions of dollars in fees while maintaining broad access to safer small credit.¹ In these states, lenders profitably offer small loans that are repaid in affordable installments and cost four times less than typical single-payment payday loans that borrowers must repay in full on their next payday. This proves that states can effectively reform payday lending to include strong consumer protections, ensure widespread access to credit, and reduce the financial burden on struggling families.

However, in most other states, single-payment payday loans remain common. The large, unaffordable lump- sum payments required for these loans take up about a third of the typical borrower’s paycheck,² which leads to repeated borrowing and, in turn, to consumers carrying debt for much longer than the advertised two-week loan term. In previous research, The Pew Charitable Trusts has found that single-payment loan borrowers re-borrow their original principal, paying multiple fees, for five months of the year on average.³ Additionally, some lenders have shifted from single-payment to high-cost installment payday loans to evade consumer protections.⁴

In 2014, Pew reviewed state payday loan regulations and prices to better understand marketplace trends.⁵ This brief updates that study using data from regulators in the 32 states that allow payday lending (18 states and Washington, D.C., do not) and advertised pricing from the nation’s six largest payday lenders to determine available loan types and costs as well as applicable consumer protections. This analysis shows that lawmakers in states that allow payday lending and wish to preserve the availability of small credit can do so and protect consumers at the same time by enacting comprehensive reforms.

Payday loan reforms ensure availability of credit

By adopting balanced reforms, Colorado, Hawaii, Ohio, and Virginia have lowered the cost of small credit, provided essential consumer protections, and preserved loan availability. For instance, after Colorado changed its law in 2010 to allow borrowers to repay in installments over time and at costs and interest rates that are about three times lower than before the reform, loan sizes remained largely unchanged, total days of credit issued did not drop, the number of borrowers declined by less than 10%, and loans continued to reach roughly the same population of borrowers.⁶

Similarly, in 2018, Ohio passed bipartisan legislation that established clear rules and a level playing field for lenders. And by early 2022, the state had licensed nearly 120 locations to offer small loans. Several of these lenders are new to Ohio and had avoided operating in the state before the reforms because of a lack of regulatory clarity and an oversaturation of high-cost lenders. The total number of stores in Ohio declined after reform, which was expected. But the remaining stores became much more efficient, serving an average of 1,266 unique customers annually, compared with the national average of just 500. This increased efficiency enabled lenders to profitably offer loans at prices that are about four times lower than what they had previously charged, as required by the reform.⁷

Further, since Virginia’s payday loan laws went into effect in January 2021, new firms, such as financial technology and installment lenders, have expanded into the state’s small-credit marketplace, offering lower-cost loans and providing competition for incumbent lenders that updated their products to comply with the reforms.⁸ Although Virginia law had previously favored high-risk products by allowing much higher rates for single-payment loans and lines of credit than for small installment loans, the state now requires a safer, more transparent, and lower- cost installment structure.⁹ And lenders in the state are able to operate profitably in various ways, via storefront or online, and by offering only loans or a mix of loans, check cashing, and other financial services.

The success of Ohio and Virginia’s reforms is thanks in part to the model created by Colorado in 2010, which protected consumers and provided a profitable market for lenders.¹⁰ Although lenders warned at the time that Colorado’s reform would drive them out of business, 11 years later, four of the nation’s largest payday loan chains continue to offer small installment loans in the state.¹¹

Single-payment loans still a large share of most states’ small- credit market

Payday lenders operate stores in 32 states, of which only Oklahoma and the four that passed comprehensive reforms have fully shifted from high-risk, single-payment loans to those using an installment structure. Eighteen states and D.C. either have laws that explicitly prohibit payday lending or have low price caps that effectively do so.

Single-payment loans continue to be issued in 27 states, and lenders have tended to maintain them as the dominant product offering in states where it is legal to do so. For instance, they are the most common type of payday loan offered in 22 of those states and the only one offered in 13 of them. (See Figure 1.) In nine of those 22 states, lenders also offer payday installment loans or high-rate lines of credit, but they typically issue fewer of those than of single-payment loans. For example, from July 2020 to June 2021, Florida lenders originated approximately 3 million single-payment payday loans, but just 600,000 payday installment loans.¹²

In addition, seven states have laws that effectively limit maximum loan amounts to less than $500. Although these states also have lower borrowing costs, that is often a result only of the small loan sizes rather than actual lower prices compared with states that permit loans of $500 or higher. Most of these seven states have annual percentage rates (APRs) over 200%, with single-payment loans as the most common payday product.

Lenders generally charge borrowers higher rates on single-payment payday loans than on installment ones even when both are allowed under state law. In Idaho, for instance, lenders charge an average APR of 652% (25% per pay period) for a single-payment $500 payday loan. As a result, borrowing the same $500 repeatedly over four months will cost $1,000 in fees, nearly double the $532 that borrowers pay for a comparable installment loan offered by the same group of lenders.

Not all payday installment loans benefit consumers

Installment repayment structures are not, by themselves, sufficient to protect borrowers. A robust set of consumer protections is required to deliver better payday loans. In states that have enacted comprehensive payday loan reforms, installment loans are safer and more affordable, but, elsewhere, payday installment loans usually carry excessive prices, prolonged terms, and unaffordable payments. Borrowers in states without adequate regulatory safeguards pay only a small fraction of principal in each monthly installment and APRs in the 200s, 300s, or even higher. (See Figure 2.) Pew’s prior research has found that typical payday loan borrowers can afford payments equal to approximately 5% of their income or $125 a month, but high-cost installment loans often require payments that exceed $200—and even $300—a month.¹³

This model can produce long-term debt at high costs, similar to single-payment payday lending.¹⁴ For example, lenders in Delaware, Missouri, Texas, and Wisconsin charge annual rates of more than 300% for payday installment products. According to state regulatory data, a $500, four-month installment loan in Texas costs $645 in finance charges at an APR of 527%, with the borrower ultimately repaying $1,145.

By comparison, in the four states that have passed comprehensive reforms, lenders charge about four times less for that same loan: Virginia residents, for example, pay $138 in finance charges to borrow $500 for four months. These states’ laws deliver much lower prices, reasonable time to repay, and affordable installments, the three key components of successful reform.

Recommendations

To prevent problems caused by unaffordable payday loan products, Pew recommends that the 18 states without payday lending continue to prohibit high-cost loans and that other states either choose to follow those states’ lead or enact comprehensive reforms like those in Colorado, Hawaii, Ohio, and Virginia. The experiences of those four states provide a clear blueprint for policymakers seeking to protect consumers and enable access to small-dollar credit. And their approaches share four key ingredients: fair prices that are viable for lenders and borrowers, affordable payments, reasonable time to repay, and widespread access to safer credit.

Further, federal agencies should support state reform efforts by preventing single-payment loans nationally, curbing other harmful lending practices, and ensuring that diverse providers, including payday lenders, consumer finance companies, financial technology firms, banks, and credit unions, offer safer, lower-cost installment loans instead of loans with balloon payments.

Conclusion

State policymakers can and should effectively protect consumers from loans with excessive costs and other harmful terms.¹⁵ Single-payment payday loans still exist in 27 states and are the most common type of payday loan in most of them, even when lenders also issue payday installment loans and lines of credit. Lawmakers in states with payday lending who wish to preserve access to small loans should enact comprehensive reforms like those in Colorado, Hawaii, Ohio, and Virginia.

Appendix: Methodology

Researchers from Pew reviewed available state regulatory reports on loans issued by payday lenders to determine the most common types of payday loans in each state. (See Figure A.1.) For states that have not published relevant data in the past three years, Pew reviewed advertised product options and pricing information from the six largest payday loan chains in the U.S. and used that information to calculate dollar costs and annual percentage rates. In states that limit loan sizes to less than $500, dollar costs are based on the largest loan size allowed.

In APR calculations of single-payment payday loans, the modal term, 14 days, is used. The dollar costs calculated for a four-month loan term equal eight pay cycles, or 112 days. (See Table A.1.) In APR and cost calculations of payday installment loans, monthly payments are based on a four-month loan term.

Endnotes

1. The Pew Charitable Trusts, “Payday Lending in America: Policy Solutions” (2013), 29, https://www.pewtrusts.org/en/research-andanalysis/reports/2013/10/29/payday-lending-in-america-policy-solutions; N. Bourke, G. Kravitz, and L. Liang, “Hawaii Adopts Comprehensive Payday Lending Reform,” The Pew Charitable Trusts, June 17, 2021, https://www.pewtrusts.org/en/research-and-analysis/articles/2021/06/17/hawaii-adopts-comprehensive-payday-lending-reform.

2. The Pew Charitable Trusts, “Payday Lending in America: Policy Solutions,” 29-30.
3. Ibid.
4. The Pew Charitable Trusts, “From Payday to Small Installment Loans: Risks, Opportunities, and Policy Proposals for Successful Markets” (2016), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/from-payday-to-small-installment-loans.
5. The Pew Charitable Trusts, “State Payday Loan Regulation and Usage Rates,” Jan. 14, 2014, https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates; The Pew Charitable Trusts, “How State Rate Limits Affect Payday Loan Prices” (2014), https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2014/04/10/how-state-rate-limits-affect-payday-loan-prices.
6. The Pew Charitable Trusts, “Trial, Error, and Success in Colorado’s Payday Lending Reforms” (2014), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2014/12/trial-error-and-success-in-colorados-payday-lending-reforms. These findings are based on data collected by Colorado before and after its 2010 reform and do not reflect the 2018 changes.
7. Ohio Department of Commerce Division of Financial Institutions, “2020 Annual Report of Small Loan Act, General Loan Law, Short Term Loan Act, Consumer Installment Loan Act, and Residential Mortgage Lending Act” (2021), https://com.ohio.gov/static/documents/fiin_AnnualReport2020.pdf.
8. Virginia Bureau of Financial Institutions, “Short-Term Lender Licensees” (2022), https://www.scc.virginia.gov/getattachment/7bf02873-32fe-4b7d-8587-6d181635f924/pay.pdf.
9. The Pew Charitable Trusts, “How Virginia’s 2020 Fairness in Lending Act Reforms Small-Dollar Loans.”
10. The Pew Charitable Trusts, “Trial, Error, and Success.”
11. A. Horowitz, “A Wealth of Evidence Backs High-Cost Loan Reform,” The Roanoke Times, Feb. 11, 2020, https://www.roanoke.com/opinion/commentary/horowitz-a-wealth-of-evidence-backs-high-cost-loan-reform/article_c6f3d80a-320e-5930-9b54-111305b2adcc.html.
12. Veritec Solutions LLC, “Florida Trends in Deferred Presentment: State of Florida Deferred Presentment Program Through June 2021” (2021).
13. The Pew Charitable Trusts, “From Payday to Small Installment Loans: Risks, Opportunities, and Policy Proposals for Successful Markets.” According to the 2021 third-quarter report from the Texas Office of Consumer Credit Commissioner on Credit Access Businesses (CAB), the average CAB fee charged per transaction for an installment deferred presentment transaction was $128.58 per $100 borrowed, which equates to a 527% APR and monthly payment of $286 for a $500, four-month payday installment loan.
14. Ibid.
15. N. Bourke, O. Karpekina, and G. Kravitz, “As Payday Loan Market Changes, States Need to Respond,” The Pew Charitable Trusts, Aug. 22, 2018, https://www.pewtrusts.org/en/research-and-analysis/articles/2018/08/22/as-payday-loan-market-changes-states-need-to-respond.