The Consumer Financial Protection Bureau recently issued a report on payday loans and deposit advance loans, finding that these financial services products “lead to a cycle of indebtedness.” No surprise there.
Consumers often take payday loans as a way to bridge the gap, perhaps in order to pay for things like unexpected car repairs or medical bills – or simply to make ends meet until the next check arrives. Typically, the loans come due in one lump sum, along with a fee. Payday loans are administered by non-financial services storefronts, whereas deposit advance loans are typically administered by banks and are more akin to a line of credit.
The fees associated with payday loans are astronomical. Typically, the fees range between $10 and $20 for every $100 borrowed. According to the CFPB report, a fee of $15 per $100 “would yield an APR of 391% on a typical 14-day loan.”
The CFPB study looked at 12 months worth of records from payday lenders, and analyzed the consumers who had loans within the first month of the 12-month period, tracking them throughout subsequent months. In total, the CFPB studied 15 million storefront loans across 33 states. The average loan was $392, the average loan term was 18.3 days, the average fee was $14.40 per $100 borrowed, and the average APR was 339%. The average income of the borrower was $26,167 per year, although a quarter had an annual income of $14,172 or less. Three-quarters of borrowers were employed either part or full-time, while a quarter received either public assistance or retirement funds – Social Security, unemployment, disability, or other government assistance.
In the CFPB study, 48% of borrowers had more than 10 loans during the 12-month period, including 14% of borrowers who had more than 20 transactions. Twenty-five percent of borrowers paid $781 or more in fees during the study period. On average, borrowers were in debt 196 days of the year.
According to CFPB Director Richard Cordray, “This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden. For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates.”
The CFPB report can be downloaded here: http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf