Election-Driven Payday Loan Caps Spotlight On-Demand Wage Technology
Amid the pandemic, a ceiling on payday loans extends … state by state.
To that end, in Nebraska this week, voters approved a measure that would cap the rates levied on so-called payday loans at 36 percent throughout the state. The vote in favor of the cap, tied to Measure 428, was overwhelming, at 83 percent of the tally. Rates on those loans can reach as high as 400 percent, according to the Journal Star.
In the wake of the vote, Nebraska becomes the 17th state in the U.S., in addition to Washington, D.C., to impose such caps on payday loans, per data from the ACLU. In recent actions at the state level, Colorado put caps in place in 2018; South Dakota approved a 36 percent cap in 2016. In terms of how widespread the loans are, as estimated by the National Conference of State Legislatures (NCSL), 37 states permit payday lending; those loans are prohibited in the remaining 13 states.
The state-level initiatives come against a backdrop where, at a broader, national level, the Consumer Finance Protection Bureau (CFPB) in July repealed underwriting requirements that would ascertain a borrower’s ability to repay before extending a payday loan. At the federal level, bipartisan legislation that would cap rates at 36 percent for all consumers remains stalled.
The pandemic has exacerbated financial pressures on individuals and families in the U.S. As estimated by the Financial Health Network as recently as this summer, one in three Americans have lost income as a result of the pandemic, and according to the Network’s 2020 U.S. Financial Health Pulse, out of 2,000 adults surveyed, of those who reported losing income, 3 percent said they had turned to payday loans.
The hurdles to getting those loans remain fairly low. Borrowers only need to have a valid ID, a bank account and proof of income.
The Payday Gap
Though there’s no strict definition of what a payday loan is, exactly – it can be any small-dollar, unsecured loan with a high interest rate – its moniker hints at the typical practice of paying it back at the next payday.
And the high interest rates and spiraling fees give the nod to the fact that many people do not have enough in savings or cash flow to juggle the debt and day-to-day expenses. As estimated by PYMNTS, as many as 60 percent of consumers live paycheck to paycheck.
A number of firms in the payments space have been introducing on-demand pay solutions that disrupt the traditional two-week payroll period, and allow people to be paid in real time as they earn wages for work performed – a trend that stretches well beyond the gig economy.
In an interview with Karen Webster, Patrick Luther, who is the industry principal of financial services at Ceridian, which offers on-demand payroll solutions, said that “individuals must pay bank and auto loans, utility and credit card payments in a timely manner or risk facing penalties. Access to your money as you earn it may mean avoiding a late payment fee, a bounced check, an interest hike or relying on … high-interest cash advances.”
Separately, a recent iteration of the PYMNTS’ Next-Gen Payroll Tracker found that 90 percent of workers expect to be paid by pay cards, direct deposit or digital wallets within 10 years, indicating a desire for flexible payment choice that transcends the biweekly payment periods of old.