After examining data from more than 12 million loans in 30 states, the Consumer Financial Protection Bureau found that more than 80 percent of payday loans are rolled over or are followed by another loan within 14 days. Monthly borrowers are disproportionately likely to stay in debt for a whopping 11 months or longer.
The CFPB, which began supervision of payday lenders in 2012, focused in a new report on repeat payday loan borrowers. The agency noted that with a typical payday fee of 15 percent, consumers who took out a loan and then had six renewals paid more in fees than the original loan amount.
Think you can handle this type of loan?
I've counseled people who were stuck in a tormenting cycle of payday loans. One woman I was trying to help had a payday loan with an annualized interest rate of more than 1,000 percent. After several back-to-back loans, her debt obligation ate up most of her paycheck.
Although lots of payday business is done online, storefront lenders continue to operate in mostly low-income neighborhoods. Organizations and agencies that fight and advocate on behalf of consumers have long understood the implication of the payday loan trap, especially for the most financially vulnerable.
Because payday lenders collect their money using post-dated checks or by getting customers to give them electronic access to their bank account, they don't have to look at a borrower's ability to pay when compared to existing expenses or existing debt, says Tom Feltner, director of financial services for the Consumer Federation of America.
Last year, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. imposed tougher standards on banks that offer short-term, high-interest loans similar to storefront payday loans. The institutions have to determine a customer's ability to repay. And the same should be true for Internet and storefront payday operations.