Payday loans are a type of loan that can provide quick financial relief to people in need, but they can also be a trap. They are banned in many states because they are considered predatory loans that charge excessively high interest rates and charges, making them very difficult to repay. This can lead to a debt cycle that can last for years. The Consumer Financial Protection Bureau (CFPB) is responsible for overseeing payday loans and recently announced that it was delaying changes to payday regulations. Today, at The Indicator, we look at the payday loan business and what it's like to enter a debt cycle with payday lenders.
Lenders argue that high rates are necessary because payday loans are risky to finance. Opponents of the Obama-era payday loan rule argue that the provisions on capacity to pay were too onerous and costly. The provisions on capacity to repay were simply unfeasible and imposed burdens on consumers and lenders in the form of unreasonable levels of documentation that were not even required of mortgage lenders, according to Lynn DeVault, president of the American Community Financial Services Association. Everyday people are devastated by the payday loan debt trap. They turn to payday lenders for a short-term need for cash and end up stuck for months, even years, paying large fees on small loans without being able to pay them once and for all.
Driven by fear of returned checks or false threat of processing, payday borrowers are forced to pay loan fees before paying basic living expenses such as rent, mortgage, electricity. Among those that allow payday loans, 16 states and the District of Columbia have implemented provisions limiting interest rates to 36%, while other states have imposed other lending restrictions on payday loans. For example, one borrower quickly fell behind on paying his car and other basic expenses as he tried to avoid default on payday loans. In the 32 states that allow payday loans, borrowers can generally apply for one of these loans by going to a lender and providing only valid identification, proof of income, and a bank account. Millions of families applying for payday and car title loans face insufficient resources to make ends meet. It's no wonder that payday loans are associated with an increased likelihood of bank fines, bankruptcy, delinquency on other bills and bank account closures. Destroying this rule will only allow the payday loan industry to convert its high-interest rate loans to the benefit of the most vulnerable consumers.
At the most difficult time during her payday loan experience, Florida's Wanda Thompson* owed nine different payday lenders. Edith, a single mother from Asheville, North Carolina, cut back on her family's food, stopped driving her car and kept her lights off to save electricity as she struggled to pay her payday loan fees. The CFPB found that 3 out of 4 payday loans go to borrowers who apply for 10 or more loans per year. These delinquents and inadequate payments are likely to occur because lenders have seized key economic resources from child support payers or because the only way for these borrowers to stay afloat in the face of a payday loan debt is to give up other important bills, such as payments of child support. Instead of repaying quickly, the vast majority of payday and title loans result in another loan. Last month, the Nebraskans for Responsible Lending coalition said they had gathered enough signed petitions to get an initiative that would limit the annual interest rate on payday loans to 36% on the November state ballot.
Payday loans are marketed as one-time “quick-fix” consumer loans, for people facing a cash crisis. Some payday lenders try to get their money back by taking what is owed directly from borrowers' checking accounts, to which borrowers grant access as a condition of the loan.
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