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: http://www.responsiblelending.org/payday-lending/research-analysis/payday-loans-inc.html.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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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.





Put Interest Cap on Payday Loans – Editorial

5 01 2011

Editorial published in Lexington Herald-Leader (1/4/11)

The payday loan industry reported spending almost $120,000 in the first eight months of 2010 lobbying Kentucky’s legislature.

Advocates for the payday loan industry’s prey, er, customers, don’t have that kind of money to get out their message.

But they do have some compelling facts, if only lawmakers can turn down the volume of special-interest money long enough to listen.

The Consumers’ Advisory Council, a body created by the legislature to advise it, is urging lawmakers who convene today to impose a 36 percent interest rate cap on payday lenders.

The council, which held three public hearings last fall, listened to payday lenders, as well. One of the industry’s most persuasive arguments is that the exorbitant fees charged by banks on overdrafts and for services are unregulated and that payday loans are a better deal than paying the bank fees.

But, after considering the industry’s case, the consumers’ council decided it was in Kentucky’s best interest to join 15 other states that have enacted a 36 percent cap on payday loans, the same cap that Congress imposed for the protection of military service members.

Back in 1998, when the General Assembly first regulated payday lenders, one of the main worries was that consumers were being “rolled over” from one high interest loan to the next and incurring insurmountable debt that would lead to bankruptcy.

To address this concern, the legislature limited customers to no more than two loans totaling $500 in a 14-day period.

But the two-loan limit isn’t working, based on information from an electronic database of payday lenders authorized by the legislature last year.

“The data show that the average consumer is trapped in a debt cycle,” wrote Todd E. Leatherman, executive director of the state Office of Consumer Protection, in a letter on behalf of the advisory council to House Speaker Greg Stumbo and Senate President David Williams.

“According to the data, 83 percent of payday loans went to consumers who took out five or more loans at an APR of 391 percent during a five-month period. On a typical loan of $255, this amounts to $90 in fees per month. What is offered to a consumer as a short-term, stopgap loan, often becomes an insurmountable financial burden due to the high interest rate of this product,” Leatherman wrote.

A study released in October by economists at Vanderbilt University and the University of Pennsylvania found payday borrowers are twice as likely to declare bankruptcy as other similarly situated consumers.

Short of imposing a 36 percent cap, the council recommends other protections, such as additional consumer disclosure, allowing extended payment plans and imposing a cooling off period between loans.

Read more: http://www.kentucky.com/2011/01/04/1586537/put-interest-cap-on-payday-loans.html#ixzz1A8Y4je9w





Listen to KCRL on State of Affairs

14 11 2009

Listen to Archive copy of  – WFPL 89.3 State of Affairs –  http://www.wfpl.org/state-of-affairs 

http://www.wfpl.org/2009/11/16/be-wise-when-borrowing-money/

 

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.

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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