CFPB Study: Payday Loans Create Cycle of Debt

CFPB Issues Warning on Payday Lending Payday lending has often been criticized by consumer experts and regulators, and a new study on those loans show just how damaging they can be for borrowers.

Payday loans are more likely than other types of credit to lead Americans into a cycle of indebtedness from which it is difficult to escape, according to a new study from the federal Consumer Financial Protection Bureau. These loans are often relatively easy for even borrowers with extremely low credit scores to obtain, and it can be very tempting for those with lower incomes to be attracted to this type of borrowing at first. The CFPB has had regulatory control over the payday loan industry since January 2012.

“This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden,” said CFPB Director Richard Cordray. “For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates.”

For instance, many payday lenders generally do not take an applicant’s credit score or ability to repay into consideration, the report said. Instead, they seem to build their business models on the chances that those who obtain such lines of credit will have to do so repeatedly, meaning that these borrowers will continually be indebted to these companies, and paying high interest rates to do so.

To that end, these loans typically carry not only extremely high interest rates, but also high fees, the report said. For instance, the typical charges for taking out this type of loan generally range from $10 to $20 per $100 borrowed, and since a common repayment period for this type of lending is just two weeks, that comes to an APR of 391 percent.

[Credit Cards: Research and compare credit cards at Credit.com]

Borrowers who are looking into any type of financing, including payday loans, may need to examine not just their own immediate needs, but the impact such a financial decision will have on their finances going forward. High interest rates and fees may make whatever type of credit is being sought more expensive than they might have otherwise bargained for.

Image: iStockphoto