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Submitted by the Bond & Botes Law Offices - Friday, May 13, 2016
On Wednesday, Google posted a blog on its Public Policy Blog entitled “An Update to Our AdWords Policy on Lending Products.” According to that post and effective July 13, 2016, Google will ban ads for payday loans and some related products from their ad systems. Google defines these loans as those where payment is due within sixty (60) days of issue. In the United States, the ban will also apply to loans with an APR of 36% or higher. The ban will not apply to companies offering mortgage loans, car loans, student loans, commercial loans, or revolving lines of credit such as credit cards.
Google Protecting Users from "Harmful Financial Products"
Google notes in the post that research indicates that these loans can result in unaffordable payment and high default rates for consumers. Indeed, there is ample research to support the conclusions upon which Google bases its change in policy. In a 2008 study, researchers at Vanderbilt University and the University of Pennsylvania found that fifty-four percent (54%) of payday borrowers at a Texas payday lender defaulted on their payday loans during the first year of the loan. The study entitled Payday Loans, Uncertainty and Discounting: Explaining Patterns of Borrowing, Repayment, and Default can be found here.
Payday Loan Fees
A payday loan is essentially a short term, unsecured loan. Frequently, the term is about fourteen (14) days and the loan matures on or around the borrower’s next payday. In my experience with these borrowers in Mississippi, a typical amount borrowed is around $400.00. While that might not sound like much, it is a large sum to the average payday borrower. Usually, the payday lender doesn’t charge interest as most people are familiar with that concept. Rather, the payday lender charges “fees”. These fees might be as high as $35.00 per $100.00 borrowed. The short maturity date and the amount of these fees translate into an enormous (usually triple digit) APR percentage rate making the payday loan one of the costliest loans a consumer can have.
It is difficult to overstate the hardships that these types of transactions work on the borrowers. One particularly egregious effect is that these loans trap borrowers in a continuous cycle of high cost debt when the borrower is unable to pay the loan when it matures. This often leads to the borrower getting a “new” loan to pay off the old one. This is exactly what the payday lender wants. The “new” loan brings in more fees for the payday lender. In some instances, the payday lender is able to gain access to a borrower’s deposit accounts and can take funds from those accounts effectively defeating the borrower’s ability to stop payments from the account. Many times, bankruptcy is the only way out for these borrowers.
No doubt Google’s policy change will cost Google a substantial amount of ad revenue (easily over $35 million). For myself, it is refreshing to see a company of Google’s stature take such a step to protect consumers. The effect of the change remains to be seen as the payday lending industry aggressively markets its products through multiple channels. But a huge hat tip to Google for this policy change. I believe that it will help and perhaps others will follow Google’s lead on putting people ahead of profits.
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