New Report: Payday Loans are gateway to long-term debt

31 03 2011

New CRL Research: Average “short term” loan keeps borrowers in debt for 212 days per year

Center for Responsible Lending
March 31, 2011

Although payday loans are marketed as quick solutions to occasional financial shortfalls, new research from the Center for Responsible Lending shows that these small dollar loans are far from short-term.  Payday Loans, Inc., the latest in a series of CRL payday lending research reports, found that payday loan borrowers are indebted for more than half of the year on average, even though each individual payday loan typically must be repaid within two weeks.

CRL’s research also shows that people who continue to take out payday loans over a two-year period tend to increase the frequency and extent of their debt. Among these borrowers, a significant share (44 percent), ultimately have trouble paying their loan and experience a default. The default results in borrows paying more fees from both the payday lender and their bank.

Federal banking regulators have voiced their concerns about long-term payday loan usage. For example, the Federal Deposit Insurance Corporation (FDIC) has stated that it is inappropriate to keep payday borrowers indebted for more than 90 days in any 12 month period. Yet CRL determined that the average borrower with a payday loan owed 212 days in their first year of payday loan use, and an average of 372 days over two years.

“This new report finds even more disturbing lending patterns than our earlier reports”, said Uriah King, a senior vice-president with CRL. “Not only is the actual length of payday borrowing longer, the amount and frequency grows as well. The first payday loan becomes the gateway to long-term debt and robs working families of funds available to cover everyday living expenses.” 

CRL tracked transactions over 24 months for 11,000 borrowers in Oklahoma who took out their first payday loans in March, June or September of 2006. Oklahoma is one of the few states where a loan database makes this kind of analysis possible. CRL then compared these findings with available information from regulator data and borrower interviews in other states.   

According to Christopher Peterson, a University of Utah law professor and nationally-recognized consumer law expert, “The Center for Responsible Lending’s latest research on multi-year, first-use payday loan borrowers provides conclusive evidence that payday loans are not short-term debts. Rather, their data shows payday loans evolve into a spiral of long-term, recurrent, and escalating debt patterns.”  

Rev. Dr. DeForest Soaries, pastor of First Baptist Church of Lincoln Gardens in Somerset, New Jersey and profiled in Almighty Debt, a recent CNN documentary, also commented on the new research findings: “Reputable businesses build their loyal clientele by offering value-priced products and services. Customers choose to return to these businesses. But payday lenders build their repeat business by trapping borrowers into a cycle of crippling debt with triple digit interest rates and fees. Lenders should be completely satisfied with a 36 percent interest cap.”

To address the problem of long-term payday debt, CLR recommends that states end special exemptions that allow payday loans to be offered at triple-digit rates by restoring traditional interest rate caps at or around 36 percent annual interest. A 36 percent annual interest rate cap has proven effective in stopping predatory payday lending across seventeen states and the District of Columbia. Active duty service members and their families are also protected from high-cost payday loans with a 36 percent annual cap.

In addition, CRL notes that both states and the new Consumer Financial Protection Bureau at the federal level can take other steps such as limiting the amount of time a borrower can remain indebted in high-cost payday loans; and requiring sustainable terms and meaningful underwriting of small loans generally. 

Further information on the report is available at:

For more information: Kathleen Day at (202) 349-1871 or; Ginna Green at (510) 379-5513 or; or Charlene Crowell at (919) 313-8523 or

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation’s largest community development financial institutions.


Deferred Deposits, Delayed Justice?

24 11 2009

2010 General Assembly Facing Tough Issues

From the KY Gazette  (November 2009)

 by Laura Cullen Glasscock at

Deferred Deposits [ 2010 General Assembly]

The provisions of the check-cashing and deferred deposit statutes are currently contained in Subtitle 9 of KRS Chapter 286 that authorizes licensed deferred deposit businesses to charge a service fee not to exceed $15 per $100 borrowed. The service fee is for a period of 14 days. Borrowers may obtain one loan not to exceed $500 at any one time, and rollovers are prohibited. The deferred deposit transaction statutes were amended in 2009, effective July 1, 2010, by House Bill 444 to expand regulation of the industry. The legislation also provides for a 10-year moratorium on licensure of new businesses after July 1, 2009. A review by staff of the Kentucky Office of Financial Institutions annual reports found the number of licensed payday locations in Kentucky increased from 214 in 1998 to 754 currently.

On its face, a $15 fee per $100 borrowed appears to be interest in the amount of 15 percent. However, because of the 14-day loan term, a new loan can be obtained 26 times per year, which results in an annual percentage rate of 391 percent. Reportedly, most borrowers are unable to repay the loan with their next paycheck. As a result, borrowers often take out a new loan before their next paycheck, resulting in an additional fee. Several sources report that 87 percent of new loans are opened within two weeks or before the borrower’s next payday, indicating they are unable to repay the original or previous loan and sustain the cost of living expenses without taking out a new loan. This common practice is referred to as “rollover” Making multiple rollovers, referred to as “churning,” results in an annual percentage rate of 391 percent in Kentucky. Nationwide, churning accounts for 76 percent of the deferred deposit total loan volume.

There are alternative methods of providing small, short-term loans up to $1,000. In an effort to reach the unbanked population, the Federal Deposit Insurance Corporation is currently conducting a two-year pilot program for banks to provide small loans up to $1,000 to borrowers, even if they have poor credit. Thirty-one banks in 15 states are enrolled in the project, including two banks in Kentucky, Citizens Union Bank in Shelbyville and Kentucky Bank in Paris.

Listen to KCRL on State of Affairs

14 11 2009

Listen to Archive copy of  – WFPL 89.3 State of Affairs –


State of Affair’s Show – Be Wise When Borrowing Money
We all need to borrow money from time to time. But as you get older, it’s not just $2 from Mom to buy some candy, it might be $100,000 from a bank for a home or $15,000 from a car dealer for a car, or for some it’s $200 from a payday lender just to get through the week.

So what should you know before borrowing money? How do you avoid predatory lenders; and what if you need a loan, but you have poor or no credit? Join us on Monday as we talk about borrowing money.

Related Links:

Virginia’s Proposed Payday Regulations Aim to Keep Industry Honest

26 08 2009

Center for Responsible Lending  Applauds Virginia’s Effort to Protect Consumers

August 6, 2009 – The proposed regulations issued Tuesday, August 4 by the Virginia Bureau of Financial Institutions (BFI) confirm that payday lenders continue at every turn to avoid regulation. The Center for Responsible Lending applauds BFI for providing guidance and oversight of this industry, particularly when the legislature has allowed so many loopholes. The proposed regulations will:

  • Prevent the industry’s practice of avoiding state laws and regulation under cover of affiliate relationships.
  • Prevent the industry from avoiding the 2008 and 2009 reforms by adding ancillary products such as life insurance to the cost of the loan.
  • Prevent faux car title loans that have been pushed by the payday loan industry.
  • Require that all companies making auto loans follow the same filing rules.
  • Prevent check cashers from making payday loans.

Unsatisfied with the 300 percent APR that resulted from the General Assembly’s minor reforms of 2008, within months of the changes, payday lenders began steering customers away from the traditional payday product toward an open-end loan product, typically a $750 loan with interest rates even higher than a payday loan – and completely unregulated. The industry was able to introduce this new product because Virginia has no underlying small loan interest rate cap.

In 2009, the Virginia legislature sought to close this loophole by passing a law that prohibits payday loans and open-end loans from being made by payday lenders. However, in an effort to protect car-title lenders, the legislature created a carve-out for that industry, allowing predatory practices to continue in the Commonwealth. Within days, payday lenders began marketing these same open-end products as “car-title” loans.

Consumer lending issues will again return to the 2010 Virginia General Assembly. The Center for Responsible Lending strongly advocates the only reform that has proven effective against predatory small dollar lending is a 36 percent interest rate cap for all small dollar lending in the Commonwealth. Virginia will not need to continue its patchwork payday reforms or create a separate, car title authorization statute when it has a reasonable double-digit small loan interest rate cap in place.

Click here for more information: Charlene Crowell at (919) 313-8523 or

Guest Op-ed: Caught in the payday lending trap

28 07 2009

Caught in the payday lending trap

By Terry Brooks

At issue | July 20 column by Patrick Flannery: “Payday loans help Kentucky families.”

Payday lenders work hard at bringing up a range of issues to avoid talking about the foundation of their business, which is trapping customers in long-term debt at 400 percent annual interest.

The evidence is so clear, it’s hardly in debate anymore. Payday lenders can’t deny they live on the fees they collect from customers who cannot afford to pay off their small loans. They try to distract from it by attacking the messengers and by bringing up products they say are even worse than their own.

Once caught in the system, customers repeatedly pay fees of $50 for a $300 loan that must be paid back in two weeks’ time. As a result they find themselves needing to take out successive loans just to make ends meet. The debt trap deepens until the customer is bled dry or has some rare windfall to help escape the cycle of dependency.

This is not the exception to how payday lending works. It’s the rule.

The Center for Responsible Lending recently examined data from state regulators and found that over 75 percent of the total loan volume of payday lenders comes from what CRL calls “churned loans.”

Essentially, the structure of the loan creates the need for repeat loans to pay off the one before, allowing the lender to collect a sizable fee with each transaction. Unlike the payday lenders’ public relations effort to describe the enterprise as “emergency cash,” the real business model is based on repeat business.

The tide of public opinion has risen against these modern day money-lenders in state after state.

When our neighbors in Ohio were debating the issue, Ohio’s House Speaker Jon Husted said: “It became clear to us that we had a product in the marketplace that was harming consumers because its design by its very nature trapped people in a cycle of debt. That was the business model it was based on — return customers who couldn’t pay off their loans.”

Kentucky’s political leaders must show the same courage and stand up against an industry that preys on the financially vulnerable and erodes the financial security of families.

Gov. Steve Beshear has endorsed a cap of 36 percent on annual interest and pledged to work for its passage during the 2010 General Assembly. That 36 percent cap is modeled after the national standard that Congress has applied to protect military families from the scourge of unrestricted payday practices.

When the governor and legislative leaders make good on this commitment every Kentucky family — not just military ones — will be protected with that safeguard.

Kentucky will then join 15 other states, including Ohio, West Virginia and North Carolina, which control predatory payday lending by enforcing a two-digit cap. Arizona will also join the ranks in 2010. Their residents, like Ohio’s, upheld restrictions on payday lending interest rates with an overwhelming vote at the ballot box in favor of the interest-rate cap.

A two-digit cap does not ban small loans. It simply makes it impossible for lenders to market a product that traps their customers in debt by forcing lenders to either drastically lower their fees or give their customers more time to pay off their loans.

When payday lending is in the picture, low-income families have a harder time paying their bills, not an easier time.

They risk high-cost overdraft fees from bounced checks because the payday loan had to be paid back first. By simply having a payday loan, consumers are at a greater risk of going into bankruptcy than if they were denied the loan in the first place.

The harsh reality is that working people who need every dollar these days for essential goods and services lose many hours worth of labor from their paychecks when they have to hand over a chunk of it to their neighborhood payday lender every two weeks. This product hurts the very families its hawkers claim to help.

The commonwealth’s 36 percent cap can’t come soon enough. Kentucky’s families have suffered too long under the unbridled spirit of the payday industry.

Terry Brooks is the executive director of Kentucky Youth Advocates, a member of the Kentucky Coalition for Responsible Lending. Lexington’s Herald Leader,

Phantom Demand – New Report from Center for Responsible Lending

10 07 2009

Phantom Demand

A new CRL report released today finds that payday lenders create demand for their 400% interest loans by setting loan terms that generate rapid re-borrowing. Download the complete report  (PDF, 31 pp.) Download the executive summary (PDF 4 pp.)

Watch our video press release. 

A full three quarters of payday lending loan volume is generated by churned loans from borrowers who take another loan before their next payday.

Phantom Demand documents for the first time how quickly most payday lending customers must turn around and re-borrow after paying off what was supposed to be short-term debt. Among the over 80 percent of borrowers who conduct multiple transactions:

  • Half of new loans are opened as soon as possible.
  • 87% of new loans are opened within two weeks.
  • Only 6 percent of subsequent payday loans are taken out longer than a month after the previous loan was paid off.

The national payday lending industry originates $27 billion in loans per year. These 59 million churned loans account for $20 billion of that volume.

Americans pay $3.5 billion  every year in fees for churned loans, money that could go for essential needs, savings, or to pay off other debt.

CRL supports a 36% cap on annual interest rate to reform high-cost lending practices like payday lending. Tell your members of Congress to support federal proposals to cap annual interest rates at 36%.


About the Center for Responsible Lending
The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation’s largest community development lenders.

Copyright 2009 Center for Responsible Lending. All Rights Reserved.

Center for Responsible Lending releases new issue brief explaining Annual Percentage Rate and payday lending.

24 06 2009

Interest rate disclosures allow apple-to-apple comparisons, protect free market competition

New Issue Brief, APR Matters on Payday Loans, now availble from the Center for Responsible Lending.

Loan terms are often complex and may include a number of extra fees that make the real cost to the borrower difficult to decipher and difficult to compare across credit options. Congress developed the APR, or Annual Percentage Rate of Interest, as a standard measure that calculates the simple interest rate on an annual basis (including most fees), accounts for the amount of time the borrower has to repay the loan, and factors in the reduction in principal as payments are made over time.

For centuries, the standard has been to compare interest rates on an annual basis, whether the loan is scheduled to be paid off in less than one year, more than one year, or in multiple years. U.S. consumer lending law applies this measure across the board, whether for car loans, mortgage loans, cash advances on credit cards, or payday loans.

Issue Brief Overview:  The new issue brief includes an example of a payday loan contract showing the 456.25% APR charged. This is a valuable addition to the advocacy tools needed to combat the industry assault on a bedrock consumer protection.

Read the full issue brief and view video at CRL’s website:

View or download the Center’s new issue brief, “APR Matters on Payday Loans” at CRL’s website: