Payday lending is an especially important issue during the holiday season – as lenders market and advertise their loans as a way for people to get through the gift-giving period of the year. But no matter the time of year, these 400+ percent interest loans continue to present a real and dangerous economic risk for people; studies suggest that payday loan borrowers are at increased risk for check account closures, credit card delinquency, and even bankruptcy.
Payday loans are small loans marketed as a quick, easy way to tide borrowers over until the next payday. However, the typical payday loan borrower is indebted for more than half of the year with an average of nine payday loan transactions at annual interest rates over 400%.
Since 2005, no state has authorized this high-cost loan product. Additionally, the District of Columbia and six states - Arkansas, Arizona, New Hampshire, Ohio, Oregon and Montana – have all enacted meaningful reforms.
Yet for people living in the states without payday loan protections, these small dollar loans continue to worsen financial problems. Loan terms that require full payment in as little time as two weeks plus an average 400 percent annual interest, catch borrowers in a turnstile of debt. Before long, payday’s cycle of debt denies dollars for household budget items like child care, groceries or utilities.
Fast Facts--Payday Loans
Since its inception in the 1990s, the payday lending industry has established over 22,000 locations which originate an estimated
$27 billion in annual loan volume.
Nationally, there are more than two payday lending storefronts for every Starbucks location.
The typical two-week payday loan has an annual interest rate ranging from 391 to 521 percent.
The“churning” of existing borrowers’ loans every two weeks accounts for three-fourths of all payday loan volume.
Repeated payday loans result in $3.5 billion in fees each year.
Loans to non-repeat borrowers account for just two percent of the payday loan volume.
The average payday borrower has nine transactions per year.
90% of the payday lending business is generated by borrowers with five or more loans per year, and over 60% of
business is generated by borrowers with 12 or more loans per year.
If a typical payday loan of $325 is flipped eight times, the borrower will owe $468 in interest; to fully repay the loan and principal, the borrower will need to pay $793.
The typical payday borrower remains in payday loan debt for 212 days of the year.
From 2008-2010, voters in three states have said ‘NO’ to triple digit interest rates when their state legislatures did not: Arizona, Montana and Ohio.
Seventeen states and the District of Columbia have enacted double-digit rate caps on payday loans.
Studies have shown that payday borrowers are more likely to have credit card delinquency, unpaid medical bills, overdraft fees leading to closed bank accounts, and even bankruptcy.
The Problem with Payday Loans: A Debt Trap difficult to break
In today’s economy, most people are feeling financially stressed. Whether making ends meet on retirement benefits or living from paycheck-to paycheck, or few if any savings, the costs of daily living seem beyond the financial capability of many people.
When these issues are struck by unexpected or emergency expenses, many consumers who need only a few hundred dollars may consider a payday loan. Yet for almost all payday borrowers, payday loans’ triple-digit interest rates only worsen – not improve – their finances.
Strategically located in low-income neighborhoods, payday loan stores reap millions in profits from a product designed to force borrowers into repeat loans. With each loan renewal or flip, borrowers become unable to both repay the lender and have enough money left until the next payday arrives. The trap of recycled debt is also how billions are taken each year from poor people.
This video from the Mississippi Center for Justice, shares a real-life story of what really happens with payday loans:
What Are The Solutions?
What Are the Solutions to Payday Loans?
A 36 percent interest rate cap on payday loans effectively stops the cycle of debt. Currently 17 states and the District of Columbia have enacted double-digit rate caps.
Local communities with home rule can enact local ordinances to curb payday lending. With unanimous city council support Dallas, TX passed one of the nation’s strongest local laws on payday loans.
Federal laws enacted with bipartisan support make it illegal to charge service members more than 36 percent interest on a loan. One of the key enforcement roles of the Consumer Financial Protection Bureau is to closely monitor lenders who continue to prey on military personnel.
Limit the loan amount as well as the length of the loan. In less than a year’s time after Washington State enacted payday loan limits, consumers saved more than $122 million in fees.
Identify lower cost, small dollar loans available through credit unions and community-based organizations. Many organizations are now offering programs that provide loans while teaching borrowers how they can begin regularly saving.
What Others Are Saying About Payday Loans
Elected Officials, Community Activists and Journalists Agree:
Payday Lending Harms – Not Helps – Consumers
“I’ve seen soldiers at payday who were financially strapped, terribly vulnerable, and willing to sign anything to get a few dollars. And I think this behavior, if it’s targeted to exploit soldiers, is absolutely reprehensible. A 36 percent cap, I think is more than reasonable.”
--U.S. Senator Jack Reed (RI) at a senate hearing on the Military Lending Act.
“This legalized form of loan-sharking exploits hard-working families who find themselves in a temporary cash shortage with few convenient or accessible options."
--Julian Bond, Civil Rights Leader, former Georgia State Senator
"I will not retreat from my pledge to eliminate all payday lending, whether it occurs at a storefront in Arkansas or over the Internet."
--Arkansas Attorney General Dustin McDaniel August 10, 2010
“Banks don't use the term payday loan, but that's exactly what they're peddling with direct deposit loans. They offer loans to customers whose paychecks are automatically credited to their checking accounts. The principal and exorbitant fees are deducted with the next deposit.”
--Roanoke Times Editorial – August 29, 2011
“Lenders make their money off the upfront fee, so they have an incentive to issue as many loans as possible.”
--Los Angeles Times Editorial, September 6, 2011
“Louisiana has one of the country's highest concentrations of payday lenders. That makes sense. Louisiana has the country's second-highest poverty rate. What doesn't make sense is the lack of oversight or regulation, which allows payday lenders to take advantage of people in need.”
--Edward Ashworth, Director of the Louisiana Budget Project in a Times Picayune guest column – August 21, 2011
"It is our experience that the profitability of many of the types of small dollar, short-term loans that NCCCs [National Consumer Credit Corporations] would likely seek to offer is dependent on effectively trapping consumers into a cycle of repeat credit transactions, high fees, and unsustainable debt."
--Grovetta Gardineer, Deputy Comptroller for Compliance Policy, discussing agency concerns about H.R. 6139 during her testimony before the Subcommittee on Financial Institutions and Consumer Credit of the U.S. House Committee on Financial Services.
How Payday Lending Works
What About Predatory Bank Payday Loans?
CRL is also concerned about a growing trend among a few big banks. Wells Fargo, US Bank, Fifth Third Bank and Regions Bank are making predatory payday loans at annual interest rates of 365%. Learn more about this trend.
Center for Responsible Lending | 302 West Main Street, Durham, NC 27701 | (919) 313-8500 District of Columbia Office | 910 17th Street NW Suite 500, Washington, DC 20006 | (202) 349-1850 California Office | 1330 Broadway Suite 604, Oakland, CA 94612 | (510) 379-5500