Here's why we need payday lenders

It's easy to find fault with payday lenders.

For many American households still struggling to repair the financial devastation left behind by a wave of abusive mortgage lending that collapsed the global financial system, companies charging triple-digit annual interest rates for short-term loans are an easy target.

Tougher government regulations on them, though, likely will do little to help their regular customers.

Federal regulators Thursday announced a sweeping clampdown on a cottage industry of companies that extend short-term, high-interest loans to borrowers with nowhere else to turn for the next monthly rent check or car payment.

The Consumer Financial Protection Bureau, created by Congress in response to the mortgage lending abuses of the early 2000s, said Thursday that vulnerable borrowers need to be shielded from predatory practices that create "debt traps" for millions of households living from one inadequate paycheck to the next.

"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," CFPB Director Richard Cordray said in a prepared statement.

Still, whether or not the rules are enacted, American households at the lowest rung of the income ladder will continue to struggle to make ends meet until wages begin growing more in line with the rest of the workforce.

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Even as the U.S. economy has recovered from the Great Recession, the benefits in wage gains have been skewed heavily toward those at the top.

Since 2000, weekly wages have fallen by 3.7 percent, adjusted for inflation, for workers in the bottom 10 percent, and by 3 percent among the lowest quarter, according to the Pew Research Center. For those near the top, real wages have risen by 9.7 percent.

Payday lenders have come under attack by critics who describe them as part of an exploitive, deceptive industry that lures desperate borrowers in highly profitable loans that can weigh on poor households with limited means to pay the rest of their monthly expenses.

That's why roughly half of all states ban payday lending outright or have caps on how much payday lenders can charge in interest.

But banning this financial service hasn't diminished demand from the millions of American households at the bottom of the income ladder who have trouble, every month, making ends meet.

Some 12 million Americans take out a payday loan each year, according to surveys by The Pew Charitable Trusts, with the average borrower taking out eight loans of $375 each per year, spending $520 on interest.

To consumers with good credit and adequate income to qualify for low borrowing rates, those borrowing costs may sound like an unscrupulous lender taking unfair advantage of a borrower with no alternatives.

But those numbers aren't out of line with other short-term financial transactions that wealthier consumers routinely encounter without protest.

Take, for example, the cost of renting a car. If you pick up a Toyota Corolla at the airport, you'll expect to pay, on average, about $50 a day. That works out to about $1,500 on a monthly basis, which is enough to buy three brand-new Corollas.

If you rent a house on Airbnb for $200 a night, you're paying the equivalent of a $6,000 per month mortgage. If you kept that up on an annual basis, you could buy yourself a million-dollar home.

The same math applies to payday lending. Borrowers are, in effect, renting money for a week or two and paying it back. To be sure, the annual cost of rolling over a short-term loan indefinitely would wipe out all but the wealthiest households. But so would renting a car at daily rates instead of buying one for the long term.

The underlying problem, argue critics of the government clampdown, is that wages for the bottom of the income ladder don't allow the typical household to make ends meet.

So regulating payday lenders out of business, they argue, will only leave the most economically vulnerable nowhere to turn when they come up short on a rent check or car payment. The alternative — eviction or a visit from the auto repo man — just pushes them further down the economic ladder, these critics argue.

"Short-term, small-dollar credit is essential to the roughly 51 million American consumers who don't have sufficient access to traditional banking services or products," said U.S. Rep. Randy Neugebauer, R-Texas, who represents a district with more than half of his constituents living on less than the median income. "Where do these consumers turn for credit?"

Beyond the pushback from Congress, the proposed regulations also face stiff opposition from payday lenders.

The new rules would force many lenders to close shop and cut loan volume by roughly 85 percent, according to the Community Financial Services Association of America, a trade group.

The Associated Press contributed to this report.