On March 31, 2011 The Center for Responsible Lending put out a publication entitled “Payday Loans, Inc.: Short on Credit, Long on Debt” where they featured a recent study of payday loan borrowers. The CRL tracked 11,000 Oklahoma payday loan borrowers for 24 months from the date of their first loan and revealed their findings in their latest publication.
Their overall findings showed that average borrowers remain indebted for longer than the 90 days considered acceptable by the FDIC. They found in the first year of borrowing the average payday loan debtor was in debt 212 days, 58% of the year.
The main findings can be outlined as:
- “The typical payday borrower remains in payday loan debt for much of the year, and many borrowers remain indebted in payday loans for extended periods of time.
- Payday borrowers’ loans increase in size and frequency as they continue to borrow.
- A significant share of borrowers become late or default on their payday loan, triggering more fees and placing their bank account at risk.”
Obviously, interest rates sky rocket the amount due on the loan. Interest rates on payday loans are generally anywhere between $15 – $20 per each $100 borrowed, which equates to around a 400% APR for a two-week loan. The study suggestions that the triple-digit annual interest rates should be halted by states and the common 36% APR should be set in its place.
Payday lenders themselves acknowledge that their product is harmful if used on a continuing basis even though the bulk of payday revenue comes from borrowers stuck in repeated payday loans.
The CRL suggests the following to ideas to help prevent a short term debt from turning into a long term debt:
- “limiting the amount of time a borrower can remain indebted in high- cost payday loan debt;
- setting sustainable loan terms which provide the borrower adequate time to repay and prohibit the taking of a borrower’s personal check or an ACH authorization as security for the loan;
- responsible underwriting standards that take the borrower’s income and other obligations fully into account; and
- facilitating efforts to help households save”
Below is the CRL’s image showing the “debt treadmill” that payday loan borrowers may find themselves on. A troubling concern being that for a person already living “close to the edge” repaying a loan in full from a single paycheck is not going to be an easy feat.
One’s “short term fix” of taking out a payday loan may seem appealing at first however what most borrowers don’t realize is that they will more than likely stay in the vicious payday loan cycle for much longer than anticipated.
To read the entire study click here.