Consumer Finance

Several recent developments have raised the possibility of banks and credit unions offering small installment loans and lines of credit—which would provide a far better option for Americans, who currently spend more than $30 billion annually to borrow small amounts of money from payday, auto title, pawn, rent-to-own, and other small-dollar lenders outside the banking system. Consumers use these high-cost loans to pay bills; cope with income volatility; and avoid outcomes such as eviction or foreclosure, having utilities disconnected, seeing their cars repossessed, or going without necessities. Many of these loans end up harming consumers because of their unaffordable payments and extremely high prices; in the payday and auto title loan markets, for example, most borrowers pay more in fees than they originally received in credit.

As the scale of the economic fallout from the coronavirus pandemic became clear, five federal financial regulatory agencies in late March took the unusual step of issuing a joint statement encouraging banks and credit unions to offer emergency small loans to struggling consumers.

Pew’s research has found that when states do not implement standards around pricing and affordability, payday and auto title loans cost three to four times more than is necessary to have widespread access to this credit.

As businesses and policymakers seek to promote the development of new payments technologies, the need to also ensure safety and efficiency will present a range of challenges to regulators and traditional financial systems.