Tags: Payday | Loans | borrow | consumer debt

Payday Loans Found to Create Lingering Debt Trap

By    |   Tuesday, 25 March 2014 12:59 PM

Most payday loans lead to a “revolving door of debt” because most borrowers can't break the cycle with a single loan, raising concerns within the Consumer Financial Protection Bureau (CFPB).

Payday loans are sometimes called “cash advances” or “check loans.” Borrowers tend to use this credit option to get quick, easy access to cash, generally in amounts of $500 or less, notes the CFPB.

The problem is that most of those borrowers struggle make it a one time deal.

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Four out of five payday loans are rolled over or renewed within 14 days, new research from the CFPB finds. That means only 15 percent of borrowers fully repay the debt without re-borrowing within two weeks, notes the CFPB.

Nearly half of payday loans are paid of with no more than one renewal or additional loan. But almost half are made to people as part of sequences of 10 or more loans, notes the Los Angeles Times.

Given that figure, the Times says CFPB Director Richard Cordray notes “one could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term.”

According to CBS News, payday loans are often are made to borrowers with weak credit or low incomes and the lenders commonly set up shop near military bases.

The CFPB report, which is based on data captured over a 12-month period, found that one in five borrowers who receive monthly benefits, such as Social Security Disability, remained in debt for the entire year.

By the time many repeat borrowers escape the debt trap they pay the equivalent of annual interest rates that run to three digits, says CBS.

For many people, the loan fees exceed the original loan amount, notes the CFPB.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” said Cordray said in a press release.

“As we work to bring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind.”

The Community Financial Services Association of America represents storefront lenders. The trade group touts a nationwide poll it commissioned revealing that 91 percent of borrowers were satisfied with their payday loan experience, reports the Times.

But earlier this year, after federal regulators announced intentions to examine payday loan products for affordability, large institutions that had ventured into the business, such as Wells Fargo and U.S. Bancorp, stopped offering the loans, says the Times.

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Most payday loans lead to a “revolving door of debt” because most borrowers can't break the cycle with a single loan, raising concerns within the Consumer Financial Protection Bureau (CFPB).
Payday,Loans,borrow,consumer debt
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2014-59-25
Tuesday, 25 March 2014 12:59 PM
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