Report Reveals Cyclical Nature of Payday Loans

Consumer advocates for years have warned that the payday loan industry preys on low-income borrowers who become reliant on one loan to pay off another — with enormous interest rates applied all the while. But a report released yesterday offers what is perhaps the most clear evidence to date that payday lending mires borrowers in cycles of debt.

After examining records for the more than 80 percent of payday borrowers who take out multiple loans each year, the Center Responsible Lending, a consumer advocacy group, found that half took out new loans either immediately or, depending on the state, at the first opportunity the law allows. Within one week, 78 percent of multi-loan borrowers had returned for another round. Within 30 days, the figure jumped to 94 percent.

The fees associated with the repeat loans, CRL found, amount to $3.5 billion each year.

“Rather than serving as a bridge to get a borrower past a financial emergency to their next payday,” Leslie Parrish, senior CRL researcher and co-author of the report, said in a statement, “the data clearly shows payday loans work more like a shovel into deeper debt.”

The issue is on Congress’ radar, with at least two proposals to rein in the industry floating around Capitol Hill. One of those, as we pointed out a few months back, is a loophole-riddled bill that would effectively endorse payday lending as a legitimate business practice, while capping the annual interest rates for payday loans at the equivalent of 391 percent. The other aims to kill the industry altogether.

But whether Congress takes up either this year is still very much in question.