A recent change in direction by the Consumer Financial Protection Bureau is better news for consumers who rely on small-dollar payday loans to pay emergency expenses. It’s also good news for the auto repair industry because a large number of their customers depend on those loans to fix their cars.
Building and maintaining savings should be a priority for every family. Unfortunately, only a small percentage of Americans have enough money set aside to weather even a small emergency. A 2016 study released by the Associated Press and NORC at the University of Chicago revealed that $1000 was more money than most households had in savings. Of households making less than $50,000 a year, 75% did not have $1000 in savings. Sixty-seven percent of households earning between $50,000 and $100,000 did not either. Nearly half of Americans surveyed in 2015 said they could not afford an unexpected bill for $400.
As those in the car repair business know, $400 is approximately the cost of a typical car repair. The 2016 CarMD Vehicle Health Index broke down the numbers by state, revealing that the average car repair costs between $354 (Michigan) and $435 (California). That means nearly half of Americans can’t afford to pay a typical car repair out of pocket. At the very least, they would have to creatively finance part of it. The problem is, most Americans are dependent on their cars to get to work. If they can’t get to work, they can’t earn enough money to repair the cars that transport them to work. That being the case, most people will try and come up with the money however they can.
Many people turn to small-dollar loans for this. Small-dollar loans include payday, vehicle title, and high-cost installment loans. They are high interest loans that are intended to help people bridge the time gap between paying for an emergency bill and their next paycheck. These loans are far from ideal, but for people with no other options, they solve a temporary crisis. When surveyed, people say they value having access to small-dollar loans as a “safety net.” For people who do not have access to more traditional forms of credit, small-dollar loans are easy to get.
Last October, the Consumer Financial Protection Bureau, issued a rule on these loans. This payday loan rule focused on disallowing small-dollar loans to people who would not be able to pay back most or all of the loan at one time. It’s designed to push lenders to offer lower interest loans and to limit the dollar amount and frequency with which they can loan money. The CFPB cannot regulate interest rates, but it can regulate small-dollar loans in other ways in order to make it undesirable for companies to offer these types of loans. This penalized people who want access to short-term loans and are willing to pay for it. It also penalized businesses – like auto repair – that provide emergency services and must be paid for them.
There has been a shift in power at the CFPB as of the new year. New director Mick Mulvaney seems to be walking back the tough stance Richard Cordray took last fall. The finance industry, the GOP, and consumers criticized the CFPB and the rule, and this January the CFPB announced that it would allow lenders subject to the rule to ask for a delay in complying with the first deadline, allowing time for a possible repeal by Congress. It’s unclear as of yet what will happen, but the CFPB has backed off some of the pressure of implementation for now.
For consumers and businesses, short term credit is crucial part of the financial system. Life is messy and expensive and, at least in America, runs on credit, including payday loans. While better financial planning and an emphasis on saving money would benefit everyone, more regulation – without offering limited credit consumers other options for financing their emergency bills – doesn’t help anyone.