DURHAM, N.C. – A new Center for Responsible Lending (CRL) report reveals financial distress among participants of Colorado focus groups who have taken out longer-term payday loans that are touted by payday lenders as a better, more affordable option than traditional short-term (often two-week) payday loans. Colorado banned short-term payday loans in 2010. Participants stuck in long-term payday loans described difficulty paying bills and faced aggressive debt collection. The hardest hit were those experiencing delinquency or default, which currently happens with one in four Colorado payday loans.
In 2010, Colorado passed a modest reform measure which established a six-month minimum term, and changed the fee structure. Colorado payday lenders have discretion to charge borrowers up to 214% annual percentage rate (APR) per loan—currently, these loans average 129% APR. The lenders can still gain access to the customer’s bank account and can make loans without assessing the borrower’s ability to afford them, two features that allow payday lenders to trap customers in a cycle of high-cost loans.
Attempting to juggle competing financial demands, many of the focus group participants had taken multiple loans from various lenders at the same time, or were also struggling with other significant obligations such as student loans, medical debt, or other basic living expenses, which shows that the lenders were making no assessment of whether a customer could afford to repay the loan while covering existing debts and other expenses.
Among the comments of participants, who all took out loans from storefront payday lenders after Colorado’s 2010 legislative reform took effect:
“I start sinking more than I have ever.”
“I just couldn’t afford paying all these payday loans. My whole check would go to them.”
"Because we were just so far behind in things, paying that loan back, we got behind on other things."
Though the report was conducted in one state, the findings have implications for other states.
“In the past few years, payday lenders in numerous states have peddled legislative proposals to expand their lending activity to also include extremely high-cost loans lasting several months, and re-payable in installments,” said CRL Executive Vice President and Director of State Policy Diane Standaert, who co-authored the report. “While most of these expansion proposals have been soundly rejected, payday lenders have migrated into these loans in states which require no regulatory change to do so. The insights reflected here should be helpful in evaluating the impact of longer-term payday loans on consumers' financial health.”
“Colorado provides a natural experiment to answer questions about the borrower experience with longer-term payday loans because, for the past seven years, Colorado has been the only state where payday lenders could originate only longer-term loans, rather than both short- and long-term loans,” said CRL Director of Research Tom Feltner, who co-authored the report. “Unfortunately, many focus group participants describe similar hardships related to longer-term loans under Colorado law as they do for other triple-digit interest products.”
“Colorado payday customers lured by claims of ‘fast easy cash’ to fill the gap between income and living expenses often found that payday loans widened the gap, and pushed them further behind,” said CRL Western Office Director Ellen Harnick, who co-authored the report.
CRL recommends policymakers recognize the harms described by customers who have taken longer-term triple-digit interest payday loans and avoid substituting one harmful product for another.
For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Carol Hammerstein at firstname.lastname@example.org.