Some states and localities are drafting legislation to reduce the number of payday loans that a lender can provide within a year (for example, limiting them to no more than 6 loans in a year to an individual). Looking at the data, why might lenders be so opposed to such limits?
Lenders may be opposed to limits on payday loans due to several reasons:
1. Profitability: Payday loans typically come with high interest rates and fees, making them a lucrative source of income for lenders. Imposing limits on the number of loans a lender can provide to an individual can significantly reduce their potential revenue. With fewer loans approved, lenders may experience a decline in their profits.
2. Business Model Disruption: Some lenders may have built their business models around the assumption that borrowers will take out multiple payday loans throughout the year. By imposing limits, this business model is disrupted, and lenders may have to restructure their operations or find alternative revenue streams.
3. Customer Dependency: Payday lenders often rely on repeat customers. These borrowers may be stuck in a cycle of borrowing and struggling to pay back their loans, leading them to repeatedly seek payday loans. By imposing limits, lenders may face a loss of repeat business, as borrowers may turn to alternative options or be unable to access credit when needed.
4. Administrative Burden: Enforcing and tracking the number of loans provided to individuals within a specific timeframe requires additional administrative efforts. Lenders may need to invest in systems and processes to monitor and enforce such limits, adding complexity to their operations.
5. Market Competition: Limits on payday loans may encourage borrowers to seek financial alternatives or turn to illegal lenders, online lending platforms, or loan sharks. By reducing the number of loans available, payday lenders may lose customers to these alternative options, which could impact their market share and overall profitability.
It is important to note that certain lenders may not oppose reasonable limits meant to protect vulnerable borrowers and encourage responsible lending practices. However, others may resist such limits due to their potential impact on the lender's profitability and business model.