How can so many people become caught in payday loan’s debt trap? This investigative report from Kansas City, MO explains just how many people get snookered by payday loans.
Each year, an estimated 12 million Americans are caught in long-term debt from loans that were marketed as a quick, easy and short-term solution. Even though most payday loans are to be repaid within two weeks, borrowers become indebted for more than half of the year, on average.
Since 2007, no state has authorized this small dollar 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
Fast Facts--Payday Loans
Twelve million Americans are trapped every year in a payday loan debt cycle.
These small-dollar loans, marketed as short-term transactions, generate $4.2 billion in predatory fees every year.
States that ban payday lending save their citizens an estimated $1.4 billion in predatory lending fees each 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.
Most payday borrowers have nine repeat loans per year and 400 percent interest.
76% of payday loans are the result of repeat borrowing on the same principal.
Among payday loan borrowers, 44% ultimately default - even after paying back their loan several times.
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.
Seven states in the nation have five or more payday stores per 10,000 households. Missouri and Nevada are the only states outside of the South. The southern states are: Alabama, Louisiana, Mississippi, South Carolina and Tennessee.
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
