In the 31 states that allow for single-payment and payday installment loans, these loans drain more than $2.2 billion in fees each year from borrowers who have an average annual income of approximately $25,000. Car-title loans drain more than $700 million in fees annually from people in 17 states. Together, these predatory loan products drain nearly $3 billion annually.
Single-payment, payday installment, and car-title loans are small loans that typically carry triple-digit interest rates that average more than 300% Annual Percentage Rate (APR). These high-cost loans are marketed as quick solutions to a financial emergency. Research demonstrates, however, that they frequently lead to a debt trap that is nearly impossible to escape. In reality, these loans often drain far more money from a person’s bank account than they originally borrowed.
By charging exorbitant fees without assessing the borrower's ability to meet the terms and repay the loan, payday and car-title loans leave consumers susceptible to a cascade of adverse financial consequences, such as difficulty covering living expenses, increased overdraft fees, delinquency on other bills, involuntary loss of bank accounts, wage garnishment, and even bankruptcy. For car-title loans, the end result is too often the repossession of the borrower’s car—with one in five car-title loan sequences ending in vehicle repossession.
Past CRL research has demonstrated that payday and car-title lenders’ bottom lines depend on borrowers being stuck in a cycle of debt. Even after essential pandemic federal relief reduced financially struggling people’s reliance on predatory lenders, among those who do take out these loans, reborrowing is ubiquitous. For example, in Kentucky, the average amount of a payday loan is $363. Additionally, in 2021 a typical payday loan user borrowed $3,363 over the course of a year and paid $587 in fees for their loans.
For payday lenders to maintain profitability, reborrowing is a central feature in the payday lending industry. In states without protections, such as California, more than half of loans go to borrowers with five or more loans a year. Further, according to the Consumer Financial Protection Bureau (CFPB), 75% of all payday loan fees are generated from borrowers with more than 10 loans a year.
|State||Average Number of Loans per Borrower||Number of Payday Loans within the State|
Source: Compilation of state regulator data as obtained by the Center for Responsible Lending.
Despite the fact that there are limited state-level data available for car-title lenders, researchers have found that the typical car-title loan is refinanced eight times. Car-title loans extract twice as much in fees as credit extended as a result. In addition to car-title loans having high reborrowing rates, in states that report data on vehicle repossessions, the share of car-title loans that lead to vehicle repossession is alarming. In California (one of the few states that reports on car-title lending), 33% of car-title loans result in the repossession of a vehicle. For many people, a car is a critical asset enabling them to go to work, attend medical appointments, and drive their children to school. Car-title loans are too often a debt trap that not only places an onerous financial burden on their borrowers but also can threaten their livelihoods.
Millions of Americans continue to experience financial precarity, and this report illustrates how payday and car-title lending extract financial resources from communities across the United States. Instead of cultivating greater economic opportunity and allowing families to sufficiently build wealth, payday loan storefronts have a history of locating in communities of color and rely on repeat borrowing to fuel their business model. The debt trap drives the fee drain.