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Payday loans put borrowers on debt treadmill

by Broderick Perkins

(4/11/2011) - Payday loan case studies reveal while the loans are advertised as quick and easy, many borrowers remained indebted for up to two years after their first loan.

The Center For Responsible Lending's (CRL) latest treatise on the payday loan industry "Payday Loans, Inc. Short on Credit, Long on Debt" tracked the transactions of 11,000 borrowers in Oklahoma found that, among 12 million Americans trapped in the payday loan cycle, struggling with interest as high as 400 percent, few are short term borrowers.

Very few new borrowers begin borrowing from a payday lender at any given point, but those who do are likely to continue for long stretches of time.

Repeated borrowing is a result of the structure of the payday loan product -- you must pay the entire amount due with a single paycheck.

CRL says that requirement virtually ensures that the already strapped borrower will not have enough money left over to get through the rest of their pay period.

Borrowers who find themselves short of cash soon after paying one loan back, must take out another to meet their ongoing financial obligations.

The report found:

• The Federal Deposit Insurance Corporation (FDIC) has ruled that it is inappropriate for payday borrowers to remain indebted for more than 90 days in any 12 month period, but CRL found that borrowers are indebted for more than twice that limit. For example, in their first year of payday loan use, borrowers were indebted an average of 212 days. Over the full two-year period, borrowers are indebted a total of 372 days on average -- more than a calendar year.

• Payday borrowers' loans balloon in size and become more frequent. Payday borrowers who take out loans over a two year period have 12 payday transactions in their second year of borrowing, up from 9 transactions in the first year. Borrowers' initial loans averaged under $300, but the average borrower in the study owes $466 on payday loans.

• Many borrowers become late or default on their payday loan, triggering more fees and putting their bank account at risk. Over the first two years of payday loan use, 44 percent of borrowers will experience a "return event" or default in which they are unable to pay their payday loan on time. Defaults trigger bounced check and associated fees.

"While the industry contends that the vast majority of its borrowers use the product responsibly -- defined as using these loans only on an occasional basis for an unexpected financial emergency -- our findings show otherwise," the report says.

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