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The Pay Day Lending Trap
Saturday, July 11, 2009
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By Amanda Logan
Center for American Progress
The Center for Responsible Lending released a report yesterday verifying for the first time what many have suspected about the payday lending industry. It often “traps” borrowers in a cycle of borrowing in order to be able to pay off their first (or second, or third) loan and still be able to cover their expenses before their next paycheck.
Payday loans are marketed as a convenient, lower-cost alternative to bouncing a check, paying service charges for a returned check, or piling up fees due to late bill payments. The estimated 19 million people who take out a payday loan in the United States each year typically only need to prove that they have a reliable source of income and a checking account in order to be approved for their loan.
As CRL points out, however, lenders generate volume and profit by requiring loans to be paid in full by the next payday and charging nearly $60 in fees for the average $350 loan. These terms essentially guarantee that “low-income customers will experience a shortfall before their next paycheck and need to come right back in the store to take a new loan.”
In fact, the Center for Responsible Lending finds that 76 percent of payday loans are made because of “churning,” or when a borrower needs to take out a new payday loan every pay period to cover their expenses and the amount they owe on their previous loan.
Earlier this year, the Center for American Progress published a report that also offered first-of-its-kind analysis of payday loan borrowers using new data from the 2007 Survey of Consumer Finances. Our report found that families who had taken out a payday loan within the past year:
- Tend to have less income, lower wealth, fewer assets, and less debt than families without payday loans....
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