Texas Payday Loan Fees Often Exceed Original Amount Loaned
The following is a digest of an article originally appearing on the AARP blog. The CLC is posting this summary to help spread information about predatory payday loans in our state.
A study found that 4 out of 5 payday loans are renewed within two weeks after the duration of the loan. 50 percent of the time, borrowers renew up to 10 times. Repeat borrowing may also be more costly than people who get these loans realize. The fees in many renewed loans ended up exceeding the amount that was originally borrowed.
“From this finding, one could readily conclude that the business model for the payday industry depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan,” Richard Cordray, director of the CFPB, said in a statement.
A payday loan is a short-term loan, which usually lasts two weeks and is meant to be used for emergencies between paychecks. The fees on these loans have been known to be extremely high. Typically, the average fee is $15 per $100 borrowed, which adds up to an interest rate of about 390 percent. Despite this, an estimate of 12 million Americans still use these loans.
The CFPB studied the one-year activity of borrowers who took out more than 12 million loans from payday lenders in 30 states. It was found that 1 out of 5 borrowers paid on a monthly basis, which is a sign that they receive Social Security or other government benefits. They also remained in debt for the duration of the time they were studied.
Director of consumer and state affairs for the AARP Public Policy Institute, Elizabeth Costle, says payday lenders usually like older borrowers on Social Security because it results in steady income.
“The problem is most people can’t pay them off in two weeks or a month,” Costle says. “They roll them over and they get more fees and more interest, and they get themselves into a debt spiral where they can’t get out.”
The Community Financial Services Association of America says that their surveys suggest that most customers using payday loans are happy.
According to spokeswoman Amy Cantu, her group is working with the CFPB to address reforms.
In November, the CFPB began taking complaints on payday loans. The number has reached several thousand so far. It is unlikely such loans will be eliminated, however.
“Preserving access to small dollar loans does mean, after all, that some such loans should be available,” Cordray said. “Our concern instead is that all too often those loans lead to a perpetuating sequence” of loans. Payday lending has been banned in some states by setting interest rate caps on short-term loans. This has not stopped online payday lenders.
Read original story here.