Consumers who borrow money from so-called "payday lenders" end up paying $4.2 billion in excessive fees, according to a new report from the Center for Responsible Lending.
The group's study 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. "Americans who think they're getting a two-week loan and end up trapped in debt," the report says.
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Efforts to reform the industry aren't working, the group claims. It says lenders still collect 90 percent of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.
The significance of that statistic hits home, it says, when you consider the payday loan industry now exceeds $28 billion a year.
The group said it used data collected by state regulators, financial records released by payday lenders, and assessments by third-party analysts, to update its 2003 quantification of the cost of predatory payday lending to American families.
Among the report's findings:
• Ninety percent (90%) of payday lending revenues are based on fees stripped from trapped borrowers, virtually unchanged from our 2003 findings. The typical payday borrower pays back $793 for a $325 loan.
• Predatory payday lending now costs American families $4.2 billion per year in excessive fees.
• States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.
"Payday loans sink borrowers into quicksand-like debt," said Michael D. Calhoun, CRL president. "Borrowers end up paying more in interest -- at rates of 400 percent -- than the amount they originally borrowed. But by addressing payday lending squarely with a 36-percent APR cap, state lawmakers can get working Americans back on solid financial ground."
Julian Bond, chairman of the NAACP said his organization is committed to fighting abusive financial practices like payday lending.
"This is hard-earned cash being siphoned out of the wallets of working people," said Bond. "This $4.2 billion is much-needed monthly benefits being squeezed out of the pocketbooks of retired and disabled folks. This $4.2 billion should be helping people stay firmly put in the middle class, rather than keeping them trapped in the quicksand of poverty."
Payday loans are marketed as short-term cash advances on the borrower's next paycheck. But previous research has found -- and this study confirms -- the industry depends on repeat business or "flipped" loans. In fact, 90 cents of every dollar payday lenders make comes from Americans caught in the debt trap -- those borrowers who are flipped into loan renewals five or more times per year.
The new report finds the average payday borrower pays back $793 for a $325 loan.
In spite of public scrutiny and recent attempts by state policymakers to reform the practice, repeat loans have only been eliminated in states that don't allow payday lending. These "safe" states -- Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, and West Virginia -- hold all lenders to their consumer loan laws, which usually include a double-digit interest rate cap.
"We join with the Center for Responsible Lending in calling for laws in every state in the nation that will protect the earnings of working people," said Jean Ann Fox, director of Consumer Protection for the Consumer Federation of America.
"In states that enforce reasonable limits on annual interest rates, payday lending is simply not a problem." Congress recently adopted this approach when the Pentagon sought protections for their troops from payday lenders. The Defense Authorization bill President Bush signed in September included a 36-percent interest rate cap on consumer loans to military families.
