Research, regulation, industry reports

CFPB: Payday loans not so short-term after all

Kelly Dilworth

When strapped for cash and hit with an unexpected bill, some people may feel as if they have no other choice but to turn to a payday lender. But new research from the Consumer Financial Protection Bureau shows that taking out one of these short-term loans could just sink you deeper into debt.

For a price, payday lenders offer small, unsecured loans (usually no more than $1,000 at a time) that, in theory, are supposed to be paid off when you get your next paycheck. Typically, payday lenders charge approximately $10 to $20 for every $100 borrowed and charge a fee every time the loan is rolled over.

CFPB: Payday loans not so short-term after all

But according to a new report, released March 25 by the CFPB, most people who take out high-interest payday loans can’t afford to repay the loan in full when their paycheck comes through. So they wind up rolling the loan over from month-to-month, like a credit card. And, in some cases, they roll the debt over so many times that they eventually owe more in fees than they borrowed in the first place.

“Many consumers would never dream of paying an annual percentage rate of 400 percent on a credit card or any other type of loan,” said CFPB director Richard Cordray in prepared remarks. But some consumers will bite the bullet for a payday loan, he said, because they mistakenly think they can quickly repay the loan as soon as they get paid.

“For consumers in a pinch, getting the cash they need can seem worth it at any cost,” he said. The problem is too many consumers find they can’t break free that quickly. So they take on additional loans and sink even deeper into debt.

“Our study today again confirms that payday loans are leading many consumers into longer-term, expensive debt burdens,” Cordray said. And that’s taking a toll on “short-term” borrowers. “The stress of having to re-borrow the same dollars after paying substantial fees is a heavy yoke that impairs a consumer’s financial freedom.”

Inside the study
The CFPB studied more than 12 million loans taken out at storefront payday loan shops around the country and analyzed how they were used over the course of 12 months.

Among the study’s key findings: 

  • Borrowers keep coming back. Eighty percent of all payday loans, for example, are either rolled over to the next month, or they’re renewed within a few weeks. That means that consumers who take out the payday loans are holding them for much longer than originally intended. “The core payday loan product was designed and justified as being expressly intended for short-term emergency use,” said Cordray in his prepared remarks. But instead, most payday loans last for months — and sometimes even longer, according to the CFPB.
  • The fees add up quickly. More than half of all payday loans end up being renewed or rolled over so many times that consumers wind up repaying at least twice the amount they originally borrowed. That’s because the fees associated with payday loans are often so high that they end up costing as much as the loan itself. “With a typical fee of 15 percent, consumers who take out an initial loan and six renewals will have paid more in fees than the original loan amount,” said the CFPB. 
  • Payday loans are hard to escape. When consumers roll over their loans from month to month, the loan amounts grow quickly, thanks to the hefty interest consumers are charged. As a result, many payday borrowers wind up with a lot more debt than they can afford to repay. According to the CFPB, more than 80 percent of all repeat borrowers end up borrowing the same amount or more than they borrowed the previous month. A large percentage of borrowers, meanwhile, are mired in so much debt that they become “trapped” by it, said the CFPB. That’s especially true for borrowers who are on a fixed monthly income. For example, 20 percent of payday borrowers living on a fixed income — such as elderly borrowers living off Social Security — were in debt for at least 12 months.

Your bottom-line
Avoid turning to a payday loan company to solve a temporary cash-flow problem. If possible, consider borrowing from a friend or family member, selling something of value or taking on extra work. Getting stuck in the payday debt cycle is something you want to avoid at all costs.

If you have a complaint about a specific payday loan company, you can submit your complaint to the CFPB online or by calling 1-855-729-2372.

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