The Consumer Financial Protection Bureau has turned its attention to payday and deposit advance loans. It issued a new report that finds these products lead to a cycle of indebtedness. Not surprising, it found that loose lending standards, high costs and risky loan structures may trap borrowers in debt.
The report highlights the significant demand for these loans. The loans are appealing to certain consumers due to their availability, especially to those who may not qualify for other forms of credit. The problem develops when consumers can't pay off the loan and must repeatedly re-borrow, thus accumulating more fees.
Payday loans are marketed as short-term cash during shortfalls between paychecks or other sources of income. They charge a set fee based on the amount borrowed, not the length of the loan. They are usually timed to be paid off at the borrower's next payday or when additional income is due to arrive.
Loan amounts are often limited by state law. The median amount borrowed by consumers in the CFPB sample was $350, but $500 is typically the maximum loan amount. This can vary by state.
The report says that states with payday lending storefronts set a maximum fee which typically ranges between $10-20 per $100 borrowed. This also varies by state, and a few states have higher or no limits; in these states, the fee is usually determined by the size of the loan.
The median fee the CFPB used was $15 per $100 which equated to $52.50 on the median $350 loan. Hence, the borrower would owe $402.50 to be repaid on the due date. That means the APR on that loan with a median duration of 14 days would be 391%.
The median consumer in their sample conducted 10 transactions over the 12-month period and paid a total of $458 in fees. One quarter of borrowers paid $781 or more in fees over the course of a year.
The study has raised consumer protection concerns for the CFPB. The Bureau will continue to investigate these payday loans and analyze the borrowing activity by the consumers that use them.