In the latest of a series of research reports, the Center for Responsible Lending has found that payday loan customers remain indebted double the time that the Federal Deposit Insurance Corporation recommends. Payday Loans, Inc.: Short on Credit, Long on Debt verifies how what begins as usually a two-week small-dollar loan becomes a deepening pit of debt lasting on average 212 days in the first year of borrowing and growing to 372 days in the succeeding year. Yet according to FDIC guidance, no payday borrower should be indebted for more than 90 days in any 12 month period.
The report also shows how the size of these loans grows over time as well. Although the first payday loan is typically only $279, the average customer will borrow more in principal and reaches $466 over time. The catch is that as the amount borrowed increases, so do the applicable fees and interest that the borrower must also pay.
According to CRL, much of the problem with fully retiring payday debt is due to the industry requirement that borrowers pay the entire loan with the next paycheck. For most borrowers, this specific loan term denies them the ability to financially manage the rest of their lives.
The financial burden of only having two weeks to repay can be insurmountable. For many borrowers, even a $300 loan eats up all remaining funds after the borrower has paid for just their most basic living expenses because they have just such a short-time to pay the loan back. For example, using the latest federal data our recent report shows that a borrower making $35,000 would have literally no money left over after taxes, basic expenses and the 400 percent payday loan. So, another payday loan renews the cycle of debt and a steady dwindling amount of available monies for everyday living.
"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."
Other independent observers reacted similarly. 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."
Viewers of Almighty Debt may recall how Soaries strongly advocated debt-free living – not only for his congregation but particularly for communities of color. In his view, debt-free living better enables families to build wealth.
Even though Congress enacted a 36 percent annual interest rate cap for active military and their families, to date only 17 states and the District of Columbia have taken similar steps to end predatory payday lending.
To address the problem of long-term payday debt in other states, CRL recommends ending all special exemptions that allow payday loans to be offered at triple-digit rates and secondly restoring traditional interest rate caps at or around 36 percent annual interest.
In addition, CRL recommends that both states and the new federal Consumer Financial Protection Bureau limit the amount of time a borrowers can remain indebted in these high-cost loans in any given year.
Further information on the report is available at: http://www.responsiblelending.org/payday-lending/research-analysis/payday-loans-inc.html
At a time when so many people of modest means are striving to financially piece their lives together, dollars are particularly dear. Quick cash may be available from payday lenders. But, there is nothing quick about getting rid of that debt. Borrowers beware.
Charlene Crowell is the Center for Responsible Lending's communications manager for state policy and outreach. She can be reached at: [email protected]