Payday Loans Create a “Debt Treadmill”

While payday lenders may claim that they provide a needed service for consumers faced with an unexpected financial crisis, the newest chapter in the Center for Responsible Lending’s (CRL) State of Lending series suggests otherwise. Drawing on data from a number of recent studies, CRL notes that the majority of payday loans are taken out for recurring, everyday expenses. Unfortunately, high-interest, short-term debt is inherently ineffective at addressing recurring budget gaps and leaves the borrower with few options other than taking out additional high-cost loans. The cycle of renewing existing loans or taking out additional loans shortly after paying off existing debt—known as loan churning—leaves many consumers on a seemingly inescapable debt treadmill. The payday lending industry relies heavily on these repeat borrowers for its revenue; every time a loan is churned, the lending fees increase yet the consumer is not granted access to new credit. CRL’s newest research indicates that of the $3.4 billion in fees payday lenders reap from consumers every year, $2.6 billion are the direct result of payday loan churning.

Over the past decade, an increasing number of states have ramped up their regulation and oversight of the payday lending industry. However, CRL identified 29 states with no substantive restrictions on payday lending. Not only is the Commonwealth included in this list, but Kentucky also stands out as having the highest average number of loans per borrower per year (10) in CRL’s comparison of selected states without meaningful regulation of payday lending. Furthermore, CRL’s report notes that Kentuckians pay a total over $112 million in payday lending fees each year.

Payday loans trap struggling families on a treadmill of debt that can lead to a host of negative consequences ranging from closed bank accounts to bankruptcy. CRL is committed to the mission of opposing predatory lending practices and the data presented in their newly released publications clearly show the high costs of payday loan debt traps. The most recent payday lending chapters, as well as the previously released State of Lending installments, can be accessed here.