Can fintechs fix punitive payday loans?

Compared to all the regulatory hits U.S. mortgage lending takes, payday lending generally gets away with a lot. Perhaps because it’s tiny by comparison. Last year $2 trillion in mortgage loans were made and this year it’s predicted to be $1.6 trillion, while the Economist reports payday lending is only a $40 billion per year industry.

But one in 50 people use payday loans annually, and the high rates create an irrecoverable debt spiral for many. The loans are about $350 with a two week term and rates around 15%, and in 2015 they Economist reports that more borrowers in California took out ten payday loans than took out one.

Payday loan revenues have dropped about 30% since 2014 suggesting that regulators (namely the CFPB) have contributed to reducing payday loan interest.

And while regs help protect consumers from punitive rates, there’s a market solution too. The proliferation of online lenders (that make it super easy for people to get personal loans fast) can help by offering more flexible terms.

Think mortgage here: where borrowers can pay back over time rather than all at once.

The lump sum repay terms of most payday loans are what causes the spiral more than anything else. Yes lower interest helps too, but flexible terms would have more impact, and provide more opportunity for a new breed of lenders to build a base of creditworthy customers.

Payday Lending Is Declining (Economist)