Pay Day Lending Facts

11 05 2009

A HIGH-COST DEBT TRAP

  • The typical interest for a payday loan is now over 400% APR. On average, the customer pays about $50 in interest every payday for a $300 loan for as long as the loan is unpaid.
  • The average payday borrower takes out 8 to 9 payday loans a year (CRL’s conservative estimate). An industry researcher has acknowledged an even higher rate, saying that the typical borrower takes out 11-12 loans.
  • About 50% of all repeat loans are originated the same day another payday loan was closed out.

INDUSTRY DEPENDS ON REPEAT BORROWING

  • 90 percent of payday loan revenues are derived from trapped borrowers. Over 60 percent of payday loan business is generated by borrowers with 12 or more loans a year
  • Carol Stewart from Advance America, when asked why her company was opposed to limiting borrowers to five loans a year, said: “We can’t live on five [loans].”
  • Dan Feehan, CEO of Cash America said: “And the theory in the business is you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.”

PAYDAY LOANS DEVASTATE BORROWERS

  • Payday lending costs Americans $4.2 billon in predatory fees every year  (KY: $130/year and 90 percent out-of-state)
  • Over half of all payday borrowers end their cycle of repeat loans by default.
  • Borrowers who are *approved* for a payday loan, as opposed to those who are denied, are 90% more likely to file for bankruptcy.

36% CAP SPRINGS THE TRAP,  RANGE OF LESS COSTLY OPTIONS AVAILABLE

  • The only proven solution to the payday loan debt trap is a rate cap at or around 36 percent APR.
  • States that ban payday lending save their residents over $1.5 billion every year
  • States that attempted reforms short of a rate cap, e.g. renewal bans, payment plans and database, have some of the worst debt trap statistics in the country.
  • Over 90 percent of non-bank financial service centers are located within one mile of a bank or credit union branch. For instance, 93 percent of non-bank businesses that cash checks are located within one mile of a bank or credit union branch.
  • A recent study from North Carolina, where payday lending was once legal, found that 3/4 of low- and middle-income families were unaffected by the ban on payday lending. Of the remaining quarter, 2-to-1 felt that the payday lenders’ departure from the state was a positive development in their life.
  • Families earning $25,000 with no savings were 8 times more likely to use payday loans than those who had more than $500 in emergency savings.  Thus far, there has been no empirical evidence that the presence of credit alternatives reduced payday loan borrowing.

(www.responsiblelending.org)

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