Each year, millions of Americans borrow small sums to help them pay for everyday expenses when they do not get enough hours at work or come up short financially for other reasons. And over more than 10 years of research and advocacy, The Pew Charitable Trusts has helped inform the creation of effective policies to make financial products for these borrowers safer, more transparent, and widely available, saving consumers billions of dollars annually.
In 2011, when Pew started researching this issue, banks offered these customers few options other than checking account overdraft, which cost consumers more than $15 billion in fees as recently as 2019. At the same time, payday lenders distributed millions of single-payment loans with interest rates exceeding 300% to borrowers who usually could not afford the payments without quickly taking another loan to cover their expenses. Payday loans proved to be deceptive and harmful, trapping vulnerable consumers in a cycle of costly long-term debt.
More than a decade later, however, better options exist, even for borrowers with damaged or no credit histories. Instead of fee-based overdraft, many banks offer small loans that are repayable in installments over several months at a small fraction of the price for a payday loan. And several states, such as Virginia, modernized their lending laws to require affordable installment payments and fees that are four times less than those for conventional payday loans. These advances are saving millions of consumers billions of dollars a year while expanding the availability of safe and affordable credit.
But problems in the small-dollar loan market persist. Many banks continue to charge billions in overdraft fees and do not yet offer affordable loans. Payday lenders still issue harmful loans in more than two dozen states that have not reformed their laws. And some lenders seek to evade consumer protections, including through “rent-a-bank” schemes in which they pay small banks to originate their high-cost loans in states where those loans are normally prohibited. However, as more banks develop affordable small-dollar installment loans or lines of credit and more states protect consumers from harmful payday loan terms, this market continues to improve.