Oct 20, 2018

Payday lenders sink borrowers in debt...

Published Dec 1, 2006, 12:00pm

Financial Quicksand: Payday lending sinks borrowers in debt...

New CRL study finds borrowers pay $4.2 billion every year in excessive payday lending fees

Every year, payday lenders strip $4.2 billion in excessive fees from Americans who think they're getting a two-week loan and end up trapped in debt. This report finds that across the nation payday borrowers are paying more in interest, at annual rates of 400 percent, than the amount of the loan they originally borrowed.

Despite attempts to reform payday lending, now an industry exceeding $28 billion a year, lenders still collect 90 percent of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.

Based on data collected by state regulators, financial records released by payday lenders, and assessments by third-party analysts, we update our 2003 quantification of the cost of predatory payday lending to American families. Breaking down the impact by state, we also calculate the savings to families in states that have banned payday lending.

In this report, we find that:

* Ninety percent (90%) of payday lending revenues are based on fees stripped from trapped borrowers, virtually unchanged from our 2003 findings. The typical payday borrower pays back $793 for a $325 loan.

* Predatory payday lending now costs American families $4.2 billion per year in excessive fees.

* States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.

* Average Borrower Pays Back $793 for $325 Loan

Payday lenders pocket $4.2 billion in excessive fees each year from Americans who seek a two-week loan and end up trapped in debt, according to a new report released today by the Center for Responsible Lending. The study calculates the cost of predatory payday lending state-by-state and also estimates that borrowers save $1.4 billion in states that enforce reasonable interest rate caps.

"Payday loans sink borrowers into quicksand-like debt," said Michael D. Calhoun, CRL president. "Borrowers end up paying more in interest -- at rates of 400 percent -- than the amount they originally borrowed. But by addressing payday lending squarely with a 36-percent APR cap, state lawmakers can get working Americans back on solid financial ground."

Julian Bond, chairman of the NAACP said his organization is committed to fighting abusive financial practices like payday lending.

"This is hard-earned cash being siphoned out of the wallets of working people," said Bond. "This $4.2 billion is much-needed monthly benefits being squeezed out of the pocketbooks of retired and disabled folks. This $4.2 billion should be helping people stay firmly put in the middle class, rather than keeping them trapped in the quicksand of poverty."

Payday loans are marketed as short-term cash advances on the borrower's next paycheck. But previous research has found -- and this study confirms -- the industry depends on repeat business or "flipped" loans. In fact, 90 cents of every dollar payday lenders make comes from Americans caught in the debt trap -- those borrowers who are flipped into loan renewals five or more times per year. The new report finds the average payday borrower pays back $793 for a $325 loan.

In spite of public scrutiny and recent attempts by state policymakers to reform the practice, repeat loans have only been eliminated in states that don't allow payday lending. These "safe" states -- Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, and West Virginia -- hold all lenders to their consumer loan laws, which usually include a double-digit interest rate cap.

"We join with the Center for Responsible Lending in calling for laws in every state in the nation that will protect the earnings of working people," said Jean Ann Fox, director of Consumer Protection for the Consumer Federation of America. "In states that enforce reasonable limits on annual interest rates, payday lending is simply not a problem."

Congress recently adopted this approach when the Pentagon sought protections for their troops from payday lenders. The Defense Authorization bill President Bush signed in September included a 36-percent interest rate cap on consumer loans to military families.

CRL's study, "Financial Quicksand: Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year," updates its 2003 estimate of the cost of payday lending. It breaks out the current cost in each state, based on state regulator data and public filings of payday lending companies. The 2006 savings estimate for eleven states that ban payday lending are based on projections of the number of stores each of those states would have if the practice were legal.

See complete report.

For more information: Sharon Reuss, (919) 313-8527 or sharon.reuss@responsiblelending.org.

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