Right now, more than one in three U.S. workers are engaged in some kind of freelancing or project-based work, either as a primary or secondary job. By 2020, half of the U.S. workers will be freelancers, if the trend continues to grow at its current pace. For the millions of workers in this gig economy, this type of employment can mean extra income on the side or an easy way to set their own work schedule. The downside is that incomes vary greatly with gig economy jobs, and when work is irregular and income flow infrequent or unsteady, many turn to small-dollar and short-term loans to make ends meet. Yet, the government has been looking into restricting access to small-dollar credit services over the past few years, disregarding the harmful effects of a potential ban.
Although freelancing is flexible, the income greatly depends on the frequency of workflow. Uber and Lyft drivers, for example, could have a slow day, or delivery workers who rely on tips could come up short -even as bills stay the same. A recent study shows that gig workers are often “reluctant” to make their primary living from independent work and would prefer traditional jobs. Others are “financially strapped” individuals who do supplemental independent work out of necessity. For many, especially those who rely on the gig economy as a sole income, having access to quick small-dollar and short-term lending services, such as payday loans, single-payment vehicle title, or longer-term balloon payment loans, is crucial to avoid falling between the cracks of sudden expense increases, demand fluctuations and, on occasion, insufficient pay. According to data from the Federal Reserve, only around 40 percent of U.S. adults can cover a $400 emergency expense.
95 percent of small-dollar loan borrowers value having the option to take out a loan and believe that these services provide a safety net during unexpected financial trouble. Yet a new rule, which is set to go into effect this August, threatens to decrease competition in the industry and reduce access to credit for the consumers who are traditionally underserved by the formal banking economy, and who use and needs these services.
The Consumer Financial Protection Bureau’s (CFPB) report published in 2016 predicted that when the 2017 rule takes effect, “payday loan volume and revenues would decline between 60% and 82%.” This would translate to denying many vulnerable consumers their only viable option to access credit.
Luckily, the Bureau recently proposed to re-examine the small-dollar lending rule, arguing that these lenders would suffer “irreparable harm” from the 2017 final rule and that it was “in the public interest” to reopen the rulemaking. This is good news for the consumers, especially for those who don’t have access to traditional credit options and need small-dollar and short-term loans to address emergencies, or even cover routine expenses.
Currently, about 12 million people turn to small-dollar loans to make ends meet, while according to a Pew Trust report, the “average payday loan borrowers earn about $30,000 per year, and 58 percent have trouble meeting their monthly expenses.” It is the CFPB’s job to protect these consumers; taking away people’s choices is not consumer-protection.
Restricting or eliminating access to small-dollar credit would go beyond only hurting the poor and the financially struggling. Small-dollar loans support not only low-income individuals who are trying to stay afloat between paychecks, but also the gig economy employees who rely on unsteady and infrequent income flows.
For the graduate student who picks up jobs on TaskRabbit in his spare time, or for the parent relying on Uber to cover rent, access to small-dollar credit is a big deal, as they often serve as a backstop to disaster. Instead of focusing on how to limit specific options to access credit, the government needs to protect the vulnerable by offering them more and better options, not restricting the few options to credit they already have. Underserved consumers will benefit when there is more competition for the types of products and services that they need.
About 35 percent of the U.S. labor force is now involved in the gig economy. That’s 55 million people driving, dog walking, babysitting, or renting their homes on Airbnb. Whether it’s by choice or necessity, millions of workers receive tangible economic benefits from the gig economy. Yet the irregularities of work and income expose freelancers to specific financial vulnerabilities that payroll workers are less susceptible to. Banning access to small-dollar credit will not take the demand away, but it will limit these workers’ access to capital and the vulnerable consumers.