Center for Responsible Lending NewsBrief
Payday Lending = Financial Quicksand
New CRL study finds borrowers pay $4.2 billion every year in excessive payday lending fees
>> Download the report (PDF)>> Download the executive summary (PDF)
Every year, payday lenders strip $4.2 billion in excessive fees from Americans who think they're getting a two-week loan and end up trapped in debt. A new study released today by the Center for Responsible Lending calculates the cost of predatory payday lending state-by-state. The report finds that across the nation payday borrowers are paying more in interest, at annual rates of 400 percent, than the amount of the loan they originally borrowed.
"Payday loans sink borrowers into debt that is like quicksand," said Michael D. Calhoun, CRL president. "The cost has been too high for too long, but now we know what to do about it. We must get working Americans back on solid financial ground."
Eleven states are projected to save a collective $1.4 billion in 2006, offering hope and an effective solution -- a cap on interest rates for consumer loans in the 36-percent range.
Payday loans are marketed as short-term cash advances on the borrower's next paycheck. But previous research has found -- and this study confirms -- that the business model depends on flipping payday loans repeatedly; 90 percent of loans go to borrowers who must renew them five or more times per year. The average payday borrower pays back $793 for a $325 loan.
In spite of more public scrutiny and recent attempts to reform the practice by state policymakers, loan flipping has only been eliminated in states that don't allow payday lending; these states hold all lenders to their consumer loan laws, which usually include a double-digit interest rate cap.
Congress recently adopted this approach when the Pentagon asked the lawmakers to protect their troops from payday lenders. The Defense Authorization bill President Bush signed in September included a 36% cap on consumer loans to military families.
CRL's study, "Financial Quicksand: Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year," provides an estimate of the 2005 cost of predatory payday lending in each state, based on state regulator data and information from the public filings of payday lending companies.
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About the Center for Responsible LendingThe Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development lenders.
Copyright 2005 Center for Responsible Lending. All Rights Reserved.
