New research from the Center for Responsible Lending finds that every year, $8 billion in fees is lost to one of two types of small-dollar, predatory lending: payday and car-title loans. Usually sold to consumers with average incomes of approximately $25,000, these loans may have different names; but both charge triple-digit interest rates that generate the bulk of their debt trap fees. These fees leave most borrowers renewing rather than retiring the loans.
The new report is the first update since 2013 that tracks fees charged state-by-state to these two predatory products. These billion-dollar fee costs do not take into account additional charges such as late fees, bounced payments or other penalties imposed by the lenders. Charges for these types of fees would be additional.
"Payday loans and car-title loans are marketed as an infusion of cash to financially struggling people," states the report. "In reality, these loans typically drain hundreds of dollars from a person's bank account in amounts well above the original loan amount. . . This fee drain hampers future asset-building and economic opportunity in communities most impacted by these predatory lending practices."
Today's report finds that payday loans drain $4.1 billion in annual fees from consumers living in one of 36 states where the loans are legal. The Consumer Financial Protection Bureau (CFPB) found that 75 percent of all payday loan fees are generated from borrowers with more than 10 loans a year. On a typical $350, two-week loan, borrowers will pay $458 in fees.
Similarly, car title loans offered in 23 states account for represent another $3.9 billion in fees each year. For these borrowers, car repossession, not repayment, is a common result that ends mobility for working families. Depending upon available alternative transportation options that can jeopardize employment.
Nearly half of these combined fees - $3.95 billion - come from only five states: California, Illinois, Mississippi, Ohio and Texas. Each of these states loses a half-billion or more in fees each year.
Conversely, CRL's report also cites progress in curbing predatory lending:
- No state has legalized payday or car-title loans between 2013 and April 2016;
- Fourteen states and the District of Columbia have enacted a rate cap of 36 percent or less;
- An amendment to the Military Lending Act has expanded the law's 36 percent rate cap to include installment loans in addition to those of payday;
Although CFPB does not have the authority to set rates on small dollar loans, it is currently, drafting new regulation affecting the industry and its debt trap on a national basis. With its future rules, the CFPB can require payday and car title lenders to ensure the loan is affordable – meaning that it can be repaid without causing the borrower to default on other expenses or quickly be flipped into another loan.
"Debt trap products like payday and car title are easy to get into, but very difficult to get out of," said Delvin Davis, CRL senior researcher. "Instead of helping consumers with a financial shortfall, the debt trap exploits their situation, leaving them worse off than where they started. A 36 percent rate cap remains the best way for states to stop the turnstile of debt these loans create."
- 2016 CRL U.S. Payday Interest Rate Map
- CRL's preliminary analysis of CFPB's proposal to address payday and small dollar loans (March 2015)
- CRL Policy Brief, Ending the Cycle of Evasion: Effective State and Federal Payday Lending (November 2015)
For more information, or to arrange an interview with a CRL expert, please contact Charlene Crowell at firstname.lastname@example.org or 919.313.8523