New rules for credit cards that are set to take effect Monday will restrict subprime borrowers' access to credit, which is seen to boosting the payday lending sector.
A second set of provisions from the CARD Act, which was signed in May, would affect how lenders earn money through fee or rate increase restrictions, specifically on existing balances.
This would mean card companies will concentrate more on less risky borrowers - those with untainted payment records. Because of this refocusing, those borrowers with tainted payment histories would eventually into the arms of payday lenders. These lenders charge rates of up to 400 percent annually for short-term loans.
These payday lending firms have been filling in the gap for borrowers searching for an alternative to credit cards but would still not be willing to give up their family-treasured valuables to pawnshops.
These firms' earnings have clearly shown this trend. Companies such as Cash America disclosed that fourth-quarter profits doubled, reaching $33.7 million, after writing high amounts of cash advances and outstanding pawn loans. Advance America, on the other hand, reported that fourth quarter profits tripled to $19.8 million due to its high-performing cash advance services and prepaid cards.
Officials from both companies say that they had been luring more customers, who previously sought for credit cards and bank loans for their personal finance needs. According to them, a wider range of Americans are now opting for payday advances. Their customers' demographics, they say, have also expanded. Average incomes of these customers rose from $41,000 to $50,000 and their median household income have reached $75,000.
The payday loan options have been a growing option for small to medium-income Americans. These are short-term loans, which normally on a two-week term with balances from $300 to $500. Currently, the payday loan industry is worth $27 billion in annual loan income.
However, these payday loans have their trappings. Regulators and consumerists have warned people on how these firms charge excessive interest rates and fees. Though some states have tried to implement certain restrictions on the industry, no concrete legislation or policy has been put forward.
But still, a large exodus to these payday loan companies due to the upcoming restrictions is unlikely to happen right away. Some analysts say that people are not likely to dump their credit cards for short term loans for retail shopping. No one could replace that plastic card with a check at the counter.
With the new law's restrictions on credit card companies to charge fees depending on a borrower's risk profile, these lenders are unlikely to provide any line of credit for them. As such, payday lenders are the only ones they've got.