Hiding Ability to Compare True Costs of Loan Options Lets Lenders Take Advantage of Consumers
WASHINGTON – The Center for Responsible Lending (CRL) today released a video for Financial Literacy Month to educate the public on why readily providing the APR (annual percentage rate) of payday loans is essential to providing financial fairness for consumers, and to urge Congress and states that still have payday lending to pass a 36 percent rate cap for annual interest on these loans.
Payday loans – also known as cash advance loans – cost American families more than $4 billion annually. Payday lenders often use a confusing array of predatory fees and interest rates to hide the true cost of the loans from consumers.
The loans are marketed as providing emergency or short-term relief, but nearly 12 million underbanked Americans annually – primarily working people who are not paid a sustainable living wage – are trapped in a cycle of debt that results in them taking out multiple high-cost payday loans per year. About 75 percent of payday lending revenue comes from borrowers who take out ten or more loans per year.
The typical consumer uses payday loans to cover everyday living expenses and essential bills until they receive their next paycheck. Borrowers often end up extending the loan multiple times to pay back their prior loans. Payday lenders make more money by letting consumers continue to roll over the loans. “The real cost of payday loans is so expensive that distracting borrowers from the cost compared with other loans makes it easier for unscrupulous lenders to lure borrowers in,” said Yasmin Farahi, senior policy counsel at CRL. “Requiring clear APR disclosure allows consumers to make true ‘apples-to-apples’ comparisons of the costs of loans over time.” CRL notes that clearly disclosing APR is such an important component of responsible lending that federal law has required lenders to reveal the APR on documents for other types of loans for more than 50 years, since passage of the Truth in Lending Act (TILA) in 1968.
Due to extensive lobbying by industry groups, payday lenders have been granted exemptions from consumer finance regulations in many states, allowing them to trap consumers in loans with annual interest rates of 300 percent or higher. In one case, a $300 loan ended up costing a borrower about $5,000 in interest and fees. Because the payday lender often has access to the borrower’s bank account and can repeatedly collect triple-digit interest rates and fees, the payday lending debt trap can have devastating consequences for borrowers, resulting in increased difficulty paying bills, delayed spending on medical needs, and even bankruptcy.
“Responsible lenders readily disclose the APR on their loans, aligned with the letter and spirit of TILA,” said Farahi. “They are not afraid to let their customers compare the costs of their loans to other loans in the market. It is revealing that payday lenders often object to having to disclose the APR of their loans.”
Payday lenders do not like disclosing APR for two reasons:
- It allows a true comparison of the cost of the payday loan to other forms of credit, even short-term options such as a credit card advance; and
- While payday loans often are marketed as being for short-term use, research has proven that many payday loans are refinanced and extended for months, or even years, trapping consumers in a long-term cycle of debt. APR reveals the high cost of the loans over the duration of the time they are used.
Congress protected military personnel from predatory payday lenders in 2006 by passing a 36 percent cap on the annual interest rate for these loans. CRL, along with many state and national consumer advocacy organizations, have worked with legislators on both sides of the aisle in 18 states and the District of Columbia to cap payday loans at around 36 percent annual interest. Polls show that voters support these rates caps by a wide margin, including in Rhode Island and South Carolina, where state legislators currently are considering the issue. In Michigan, a campaign to put the 36% rate cap on the November ballot is underway.
CRL urges Congress to pass a federal cap of 36 percent APR to protect families who live in states without sufficient protections against exorbitant payday loan rates. States that have payday lending should also pass caps of 36% or less, inclusive of fees.
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