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.


Editorial – Gov. Beshear should stick to interest cap pledge

6 10 2009
Beshear should stick to interest cap pledge

Editorial from the Owensboro Messenger-Inquirer

Published: Wednesday, September 30, 2009
Gov. Steve Beshear isn’t delaying his efforts at securing a second term in 2011.

Since announcing his running mate in July, Beshear has begun raising funds for his run for re-election. Those efforts included a fundraiser last week at the Tennessee home of the head of a national payday lending company.

Beshear’s relationship with the payday lending industry stretches back for years, but that familiarity and his desire for a second term shouldn’t stand in the way of further efforts to restrict payday lending in Kentucky.

Kentucky isn’t the first or the only state to look at addressing the exorbitant costs and predatory practices of many in the payday lending industry.

These short-term loans, which typically must be repaid within two weeks, are marketed as a bridge to payday, but instead can drag consumers into a cycle of debt. Loans are capped at $500, and the interest rate when annualized can be as high as 390 percent.

The payday lending industry markets the loans as a short-term solution to minor financial challenges, but instead the loans are often “flipped.” This practice has consumers taking out new payday loans to repay old, and they can quickly find themselves spiraling into deeper debt.

Beshear, as a lawyer in private practice, was a lobbyist for the payday lending industry in the 1990s. That connection is likely to raise some eyebrows given the fundraiser last week at the home of Garry McNabb, the chief executive officer of Cash Express, a payday lending outfit that has more than 100 outlets in Kentucky.

McNabb and the Beshear administration both downplayed the idea that the fundraiser was an attempt to gain access to the governor’s office.

“I can assure you there has not been the first hint that the fundraiser being tied to any kind of business,” McNabb told the Louisville Courier-Journal.

Chad Aull, the political director for the Beshear re-election campaign, also dismissed any impropriety, and said Beshear supports capping annualized interest rates for payday loans at 36 percent.

That cap is a goal of consumer advocates including the Kentucky Coalition for Responsible Lending, but one that was unrealized in legislative changes made this year. House Bill 444, a stripped down version of tighter restrictions offered in 2008, was passed and created a statewide database to help ensure lenders and consumers were abiding by limits on multiple loans.

With House Bill 444’s passage, Beshear said he would continue to work with the legislature to impose the 36 percent cap, and hopefully this fundraiser isn’t an indication he has other intentions. His actions once a legislative proposal is offered next year should bear out the assertions of McNabb and Aull.

“In the future, I believe we must take the next step of imposing caps on these lenders to afford consumers even stronger protections,” Beshear said in a statement about House Bill 444 in March.

More optimistically, Beshear’s connections to the payday lending industry could offer an advantage to Kentucky consumers. The governor should use his influence with his industry connections to ensure their acceptance of the cap rather than letting their influence sway him.

Copyright © 2009 – Messenger Inquirer

Personal Stories from the Payday Lending Trap

5 10 2009

A Lawrenceburg wife and mother used a payday lender in 2001 to borrow less than $200 to cover her musician husband’s transportation expenses.  She wasn’t able to repay it within the two weeks and had to renew the loan.  She got caught in a cycle of paying minimum amounts and renewing the loan.  This went on for 18 months.  During that time, she was amassing other debts as well.  In the end, she had to refinance her home to pay off those debts as well as the payday loan.  In all, she paid back almost ten times the original loan in fees and interest.


A single mother of three in Owensboro borrowed about  $200 from a payday lender.  She wasn’t able to pay it off immediately; instead she made payments when she could.  The interest was adding up and over the course of 6 months, she paid back between $500 and $600, but still hadn’t paid the loan off.  Finally a relative paid the total in full for her, and she was able to repay him interest-free