via Report examines effects of “payday lending” on consumers | Consumer Watch, clarionledger.com, 4/26/2013
Short-term lenders are everywhere. It seems that every time there is a vacant storefront, there is a payday lender, check-cashing business or title loan company looking to do business. “Payday loans” — a short-term, high-interest loan intended to put a virtual band-aid on your checkbook until your next paycheck arrives — have been on the radar screen of consumer protection agencies for years. The problem is not just that the consumer borrows money, but that they keep rolling over the balance when they can’t pay it, resulting in high fees.
The federal government’s Consumer Financial Protection Bureau this week released a white paper on payday lending. The paper studied how much people are borrowing, how often, and whether that leads to debt.
There are some interesting facts revealed by this study. Only four percent of payday loans are made to consumers with income more than $60,000 per year. That should be no surprise; it has long been thought that the lower-income segment is the primary demographic of payday lenders. Most came from consumers at or near poverty level. Nearly 1/3 of loans were made to people making between $10,000 and $20,000 per year. More than half of those receive public assistance.
Payday loans are typically tied to the borrower’s payday, not just 14 days as is commonly believed. The study looked at how this affects consumers long-term. More than a third of borrowers take out between 11 and 19 payday loans per year, while 14 percent take out 20 or more loans.
There is a lot of money to be made in the payday lending business. Many lenders charge a fixed fee for every $100.00 borrowed. The median APR on a payday loan is 322%, with the average APR being slightly higher at 339%. The real cash cow for payday lenders are those frequent borrowers; 76 percent of payday loan fees come from those who take out at least 11 loans a year. This points to a long-term dependency, and a never-ending cycle of debt. A quarter of borrowers paid at least $781.00 in fees during a year.
But, as the payday loan industry is constantly pointing out, it appears that these lenders are providing a service to some, who use the services at low-to-moderate levels. “It appears these products may work for some consumers for whom an expense needs to be deferred for a short period of time,” notes the report. “The key for the product to work as structured, however, is a sufficient cash flow which can be used to retire the debt within a short period of time.”
The need for small loans, often a high-risk enterprise at which many traditional lenders have balked, is being filled by payday lenders. In some countries, this practice (micro-lending) is providing needed cash for short-term projects.
“However,” the CFPB notes, these products may become harmful for consumers when they are used to make up for chronic cash flow shortages. We find that a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis, suggesting that they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter.”