The State of Payday Lending: Still a Debt Trap by Design

Loan churn responsible for two-thirds of all fees. Fees paid by borrowers in Southern states make up 62% of national total.


Center for Responsible Lending
September 10, 2013

Payday loans remain a damaging debt trap for millions of Americans, according to two new chapters in the Center for Responsible Lending’s (CRL) State of Lending series. Payday loans carry triple-digit annualized percentage rates (APR) and strip more than $3.4 billion in fees from Americans annually.

Although payday lenders market these loans as a quick financial fix, CRL finds that 85% of loans by payday lenders go to borrowers who take out at least seven loans a year. Payday loans made by a few outlier banks also produce striking cycles of repeat loans.

These new chapters—covering payday lending by banks and other payday lenders — are released as state and federal leaders take multiple actions to restrict loans designed to snare people in debt, and as the Consumer Financial Protection Bureau (CFPB) considers national regulation of payday loans.

“Federal regulators and states from New York to Georgia have been working overtime to limit the impact of these debt-trap loans regardless of who makes them,” said Gary Kalman, CRL’s executive vice president for federal policy. “The CFPB has years of data showing how payday lenders operate as loan-churning machines. Once borrowers are in, it’s extremely hard to get out.”

CRL’s latest research updates key numbers on payday lending’s financial impact on American families, including:

  • Payday lenders strip more than $3.4 billion in fees from borrowers annually.
  • More than two-thirds of these fees—$2.6 billion—are the direct result of payday loan “churning,” or rapid and successive re-borrowing.
  • Based on fee volume by state, payday lenders in just 10 states collect 83% of all churned fees, with borrowers in California, Texas and the South paying the majority of fees. Borrowers in the southern states alone pay 62% of all churned fees.

Further, payday lending by banks persists, even though federal banking regulators have expressed serious concerns about it. These bank loans average up to 300% APR, with the typical borrower taking out 13.5 loans annually. More than one-fourth of all bank payday borrowers are Social Security recipients.

Payday loans lead to a cascade of negative consequences; seniors and communities of color are particularly hard hit. Residents in weakly-regulated states pay the most in fees and are the most likely to get caught in the debt trap. And in spite of Congressional efforts to protect military personnel, banks are finding ways to evade these laws and make payday loans to our service members.

“Anyone fares better without the burden of paying on a 300% APR loan every two weeks, whether the loan was made in a store, online or through a bank,” said Diane Standaert, senior legislative counsel at CRL. “A payday loan is a payday loan — a debt trap by design.”

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These latest reports in CRL’s “State of Lending” series join prior chapters on overdraft fees, car-title loans, student loans, mortgages, credit cards and auto lending. The next and final chapters will cover abuses in debt collection and loan servicing, and the cumulative impact of predatory lending on America’s household balance sheet.

For more information: Ginna Green at (510) 866-5989 or ginna.green@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.