Payday Lending Transition

For the last few years we have seen state after state restrict or prohibit payday lending. The federal government passed a law in 2007 that restricted the APR (Annual Percentage Rate) on consumer loans to military personnel to 36%. This in effect prohibited payday type loans since the APR can be 100% or higher on short term payday loans.

Payday loans are usually 1-2 weeks in duration and are assessed a flat fee. These loans are typically made to people with low credit scores who have difficulty obtaining a credit card or a consumer finance loan. A payday lender usually requires minimal information such as pay stub (to verify employment), bank statement (to verify income), utility bill (to verify residence) and a driver’s license or some other form of identification. They typically do not request a credit report and may require an automatic draft to the customer’s bank account at maturity.

The original idea behind this type of lending was to give the consumer some temporary relief for an extraordinary financial problem. This allowed them to avoid high NSF charges from the bank for bouncing checks. But many consumers have become reliant on this type of financing and begun to use it as a permanent means of staying afloat financially. State lawmakers noticed this trend and begin to pass laws in the last several years to curb this type of lending.

As part of his “Plan to Strengthen the Economy”, President-Elect Barack Obama has promised to: “Cap Outlandish Interest Rates on Payday Loans and Improve Disclosures” and “Encourage Responsible Lending Institutions to Make Small Consumer Loans”. With his landslide election on November 4, 2008, the current economic climate and a sympathetic Congress, we can expect that this type of lending will change dramatically. The plan to limit the APR to 36% across the board will require lenders to change their business practices.

As always it takes ingenuity to solve problems. Forward-thinking lenders are already preparing for this transition and are beginning to investigate and research software solutions to accommodate their needs. In order to stay in the lending business and maintain a reasonable profit margin, many lenders will begin to make longer term, installment loans. While there are a number of good solutions for the payday industry, not many of them are geared to handle the switch from a short-term, single-payment payday loan to an installment loan with the associated complexities.

Compass Technologies has an integrated suite of products to address this challenge. The Kwik-Loan suite of products will easily handle your consumer loan software needs and give you an online presence to allow automated processing of applications, online account inquiry, stored value cards and a web-based, back-end processing solution that will handle any type of consumer loan transaction.

If you are in the payday or check advance loan business and are looking for a solution, contact Compass Technologies today.

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