Posts Categorized: Press

New Report: Payday Loans are gateway to long-term debt

New CRL Research: Average “short term” loan keeps borrowers in debt for 212 days per year
Center for Responsible Lending

Although payday loans are marketed as quick solutions to occasional financial shortfalls, new research from the Center for Responsible Lending shows that these small dollar loans are far from short-term.  PaydayLoans, Inc., the latest in a series of CRL payday lending research reports, found that payday loan borrowers are indebted for more than half of the year on average, even though each individual payday loan typically must be repaid within two weeks.

CRL’s research also shows that people who continue to take out payday loans over a two-year period tend to increase the frequency and extent of their debt. Among these borrowers, a significant share (44 percent), ultimately have trouble paying their loan and experience a default. The default results in borrows paying more fees from both the payday lender and their bank.

Federal banking regulators have voiced their concerns about long-term payday loan usage. For example, the Federal Deposit Insurance Corporation (FDIC) has stated that it is inappropriate to keep payday borrowers indebted for more than 90 days in any 12 month period. Yet CRL determined that the average borrower with a payday loan owed 212 days in their first year of payday loan use, and an average of 372 days over two years.

“This new report finds even more disturbing lending patterns than our earlier reports”, said Uriah King, a senior vice-president with CRL. “Not only is the actual length of payday borrowing longer, the amount and frequency grows as well. The first payday loan becomes the gateway to long-term debt and robs working families of funds available to cover everyday living expenses.”

CRL tracked transactions over 24 months for 11,000 borrowers in Oklahoma who took out their first payday loans in March, June or September of 2006. Oklahoma is one of the few states where a loan database makes this kind of analysis possible. CRL then compared these findings with available information from regulator data and borrower interviews in other states.

According to Christopher Peterson, a University of Utah law professor and nationally-recognized consumer law expert, “The Center for Responsible Lending’s latest research on multi-year, first-use payday loan borrowers provides conclusive evidence that payday loans are not short-term debts. Rather, their data shows payday loans evolve into a spiral of long-term, recurrent, and escalating debt patterns.”

Rev. Dr. DeForest Soaries, pastor of First Baptist Church of Lincoln Gardens in Somerset, New Jersey and profiled in Almighty Debt, a recent CNN documentary, also commented on the new research findings: “Reputable businesses build their loyal clientele by offering value-priced products and services. Customers choose to return to these businesses. But payday lenders build their repeat business by trapping borrowers into a cycle of crippling debt with triple digit interest rates and fees. Lenders should be completely satisfied with a 36 percent interest cap.”

To address the problem of long-term payday debt, CLR recommends that states end special exemptions that allow payday loans to be offered at triple-digit rates by restoring traditional interest rate caps at or around 36 percent annual interest. A 36 percent annual interest rate cap has proven effective in stopping predatory payday lending across seventeen states and the District of Columbia. Active duty service members and their families are also protected from high-cost payday loans with a 36 percent annual cap.

In addition, CRL notes that both states and the new Consumer Financial Protection Bureau at the federal level can take other steps such as limiting the amount of time a borrower can remain indebted in high-cost payday loans; and requiring sustainable terms and meaningful underwriting of small loans generally.

Further information on the report is available at:http://www.responsiblelending.org/paydaylending/researchanalysis/paydayloansinc.html.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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Turning Poverty Into A Multibillion-Dollar Industry

BROKE USA by Gary RivlinHighlights from NPR and WHYY’s Fresh Air Program Interview with Author and Journalist, Gary Rivln.

Download the Fresh Air podcast or listen to the WHYY story online using the link above.

Buy Gary Rivlin’s book Broke USA on Amazon

On why payday loan operations exist in poorer neighborhoods

“[Payday loan operations] are there because banks have fled certain neighborhoods — it’s working-class neighborhoods, inner-city neighborhoods, some rural neighborhoods. Where can you get your loan? You go to a payday lender, you go to a consumer finance shop [or] you go to a pawnbroker. To me, the real reason payday has grown like it has is more of an economic reason than a geographic reason. There’s been stagnating wages among the lowest 40 percent [of wage earners] in this country, and so they’re not earning anymore real dollars. At the same time, rent is going up, health care is going up [and] other expenses are going up, and it just becomes harder and harder and harder for these people who are making $20,000 [or] $25,000 [or] $30,000 a year to make ends meet. And the pay lenders are really convenient. Between going home from work and going shopping, you can stop at one of these stores and get instant cash in five minutes.”

On how the payday lenders, pawnbrokers and check cashiers see themselves

“They tend to cast themselves as noble. You know, ‘We’re in neighborhoods doing business where others don’t go.’ It’s almost heroic because they’re brave enough to be doing business — they cast themselves as providing an essential service for the person who otherwise would be trapped. What do you do if your car breaks down and you owe a few hundred dollars, or you need to pay the auto mechanic a few hundred dollars and you don’t have a rich uncle to hit up [or] a credit card? The credit lenders claim that they play an essential role in helping these folks.”

On how the payday lenders, pawnbrokers and check cashiers see banks

“They were using the banks as a convenient whipping boy. [They were saying] ‘consumer advocates were on our case about the check-cashing fees we charge or about charging $15 for every $100 for a payday loan. Meanwhile hundreds of thousands of dollars were being lent in these subprime loans, and it virtually blew up the global economy.’ So it was a very handy whipping boy, but the banks have been the best thing happening for the payday lenders and check cashiers. They fled these communities, creating the opportunity. But more than that, it’s the big banks — the main banks, from Goldman Sachs to Wells Fargo to Wachovia to Bank of America and Citibank — that funded these industries. Whether it’s the subprime credit card industry, the payday lenders — they provided the funding and eventually helped bring some of these companies public.”

Broke USA: From Pawnshops to Poverty, Inc. — How the Working Poor Became Big Business By Gary Rivlin Hardcover, 368 pages HarperBusiness List price: $26
Visit Gary Rivlin’s website.

On the profit margins in the payday loan industry

“Until recently, they were making profit margins of 20 percent to 25 percent a year. I used to write about Silicon Valley for The New York Times. You would get noticed in Silicon Valley if you were making profits of 20 percent [or] 25 percent a year — and at the same time growing in double digits year after year. To me, the moral point is: Sure, there’s nothing wrong with doing business in the inner city or working-class community in a rusted-out Midwestern town; it’s just that you’re making so much more profit off the working poor than you are over the more prosperous customer. That, to me, is where we get into morally questionable behavior where there’s a profit opportunity.”

On rent-for-loan operations

“You need a bedroom set. You want a flat-screen TV. You just can’t put it on your credit card the way a lot of people could do it. But you want the item. And so you rent it by the week or the month, and after a certain amount of time, typically 1.5 years, it’s then yours, assuming you made every payment along the way. The genius there is [rent-for-loan operators] have figured out how to sell a $500 television set for $1,200. And their customers tend to be happy — they want the TV, there’s no other alternative that they can figure out to buy it, so they rent it by the week and if there’s a happy ending — if they made all the payments — then they get to keep it.”

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