In April I wrote about the payday loan trap. In February Allison talked about how the Consumer Financial Protection Bureau has started to monitor payday loans. Now, after a few months of monitory and analyzing these short-term high interest loans, the CFPB has put out their in-depth report. The results do not shine a favorable light on the payday loan industry.
The biggest discovery, or really the biggest reinforcement, in the Payday Loans and Deposit Advance Products white paper is that these loans really do trap people in the borrowing cycle. Because of the nature of the loan, people are often forced to take out a new loan in order to pay off the old loan. This really is not anything that people have not heard before, but what this study did was delve into the reasons behind how people get trapped in the debt cycle.
The way payday lenders get around loan sharking laws is by charging a flat fee rather than an APR. Instead of listing out how much the interest on the loan is, the average lender will put a 2 week term on the loan and charge an average of $15 per $100 borrowed. Going past the 2 week period requires another loan, and subsequently more fees. So when borrowing $350 (which is the average amount borrowed) the customer will be on the hook to pay back $400 or more. While these loans are advertised to be short-term boosts to help get you through to the end of the month, what usually ends up happening is people take out loan upon loan (the average duration of loaned money was 199 days in 2012). Paying those fees every two weeks is actually the equivalent of an interest rate of 391%.
There is more to these loans than just high interest rates. They are marketed toward people with low or no credit. In fact, much of the time the borrower just needs to supply a paystub (and give authorization for the lender to debit their bank account when the term is over). The lender then just hands out the loan with little regard to whether or not the person can actually afford the loan. After 2 weeks repayment is required in full, there are no partial payments allowed. If full repayment cannot be made, a new loan is taken out to cover the old loan.
The comprehensive study only scratched the surface of the payday loan world. It looked at 15 million loans taken from storefront locations during the calendar year 2012. But as more people get online, there are more internet based payday lenders popping up. Fortunately, the CFPB does plan to look at these lenders; unfortunately, the results will most likely be similar or worse than what was discovered in this report.
Many people are getting trapped in the debt cycle from payday loans. While it is important for these businesses to make money, they are often doing so at the expense of unsuspecting cash strapped individuals. The CFPB has been taking complaints on payday lenders for several months now. They are helping the consumer fight back against those who only have their own best interest in mind, and not the best interest of their clients. If you feel you have been cheated by a payday lender, file a complaint with the CFPB and let them help right the wrong.