Slip Sliding Into Debt: New CFPB Report Confirms Payday Loan Debt Trap
By Consumers Union on Tuesday, March 25th, 2014
Today the Consumer Financial Protection Bureau (CFPB) released a new report that chronicles how dangerous the payday loan terrain is for consumers. Payday loans are short term cash advances on the borrower’s next paycheck. The costs can quickly grow if the borrower cannot pay off the loan or needs to borrow a second loan to pay off the fist. For years consumer advocates have been sounding the alarm on the payday loan debt trap and here is the most recent evidence that more must be done soon to protect consumers. According to the CFPB report, in an analysis of 12 million loans made by payday loan storefronts:
- Four out of five people who are sold a payday loan either renew the loan by rolling it over or take out another one within two weeks, pushing them into a cycle of debt.
- Nearly a quarter of borrowers- 22% renewed the loan at least six times, causing the borrowers to pay more in fees than the amount they originally borrowed.
- Only 15% of borrowers are able to pay off a payday loan within two weeks without rolling it over or taking out another loan.
- About 48% of initial payday loans are paid off with one renewal or an additional loan.
CFPB Director Richard Cordray remarked today that payday loan products were designed and justified as being expressly intended for short-term emergency use. Yet the CFPB’s investigation “confirms that payday loans are leading many consumers into longer-term, expensive debt burdens.”
Enough is enough. Today Pamela Banks, senior policy counsel for Consumers Union, testified at the CFPB’s Payday Field Hearing in Nashville, TN. Pamela hit the nail on the head when she said, “The biggest challenge for consumers going forward is finding a short-term loan that is safe, transparent and affordable, with lending based on the consumer’s ability to pay rather than the lender’s ability to collect. We urge the CFPB to limit the excessive fees affiliated with these sketchy loans, extend payment schedules to a few months rather than weeks, and consider caps on the number of payday loans a customer can obtain in a year.”
Are you or someone you know caught in a revolving door of debt that won’t stop spinning? Ever felt like you got into a loan situation that didn’t turn out how you had expected? Tell us about it in the Comments section below.