NEW YORK (MainStreet) While industry executives protest, it's becoming clear payday loans are a financial burden on regular Americans.
The Consumer Financial Protection Bureau has been particularly aggressive in alerting consumers to the dangers of payday loans, including saying in a report out last week that:
- More than 80% of payday loans are rolled over or followed by another loan within 14 days.
- Half of all loans are in a sequence at least 10 loans long.
- Consumers are having a tough time playing "catchup" with their loans. Few borrowers amortize, or have reductions in principal amounts, between the first and last loan of a loan sequence.
- The more loans you take, the harder it is to stay above water. According to the agency, payday loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates.
- Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer.
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Overall, the CFPB reports that the average payday loan consumer remains in debt to a loan provider for 196 days more than half the calendar year.
That represents a big burden for payday loan recipients, who often pay up to 521% interest for a typical two-week payday loan, according to the Center for Responsible Lending.
"Repeat borrowing is a symptom of a borrower's fundamental inability to repay a payday loan," says Tom Feltner, director of financial services at the Consumer Federation of America. "Regardless of the term or structure of a payday loan, if back-to-back usage is frequent and lenders direct access to a bank account, borrowers are at risk. Ability to repay, not the ability to collect, should be the standard going forward."
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The CFA and the CFPB say payday lenders have an "unprecedented ability" to go after consumers who are late on their payday loan repayments. Some lenders will demand direct electronic access to bank accounts or ask borrowers to send them post-dated checks. Yet there is, both agencies say, "little or no" consideration of borrowers' ability to repay the loan when applying for a payday loan.
That often results in more loans to pay off the original loans, and a cycle of alarmingly high interest charges as the problem worsens.
Some states have tried to fight back by mandating limits on short-term payday loans. But the industry has already gotten around those rules by pushing longer loans, or even offering lines of credit to impoverished Americans who have no hope of paying the loans back.
Look for states to add more muscle against payday lenders, and for the government to take a stronger role in regulating payday lenders.
The industry certainly won't like it, but someone has to save payday borrower from themselves, and from predatory lenders.
By Brian O'Connell