Small-dollar loans have become increasingly popular nationwide, with the“payday loan” industry growing so fast that U.S. Sen. Dick Durbin (D-IL) recently sent a letter to the Community Bankers Association of Illinois, the Illinois Credit Union League and the Illinois League of Financial Institutions, urging them to work with community banks and credit unions to develop alternative lending options for the nearly 12 million Americans who take out such loans annually.
“I would appreciate any suggestions you may have as to how we can work together to create a small-dollar lending environment beneficial to borrowers, financial institutions and the economy,” Durbin said. “I also encourage you to highlight the challenges that prevent your members from offering safe and affordable small-dollar loans. Consumers deserve better than predatory businesses that make extraordinary profits by trapping them in a debt spiral that leaves them financially worse off.”
Payday loans, named for the fact that the loans typically use the borrower’s next paycheck as collateral, often carry steep annualized interest rates, as high as 400 percent. The loans often are crafted to ensnare borrowers in a debt cycle. A 2014 Consumer Financial Protection Bureau (CFPB) study found that 80 percent of payday loans are either rolled over or renewed.
Durbin also targeted predatory lending last summer, signing on with over 30 other Senators in a letter sent to the CFPB that praised actions the agency has taken to regulate "payday" lenders and similar businesses. In that letter, the senators called for an aggressive approach to protect consumers from the “cascade of devastating financial consequences” from such loans.
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