In particular, the Consumer Financial Protection Bureau (CFPB) says payday loan borrowers should take better advantage of extended payment plans. The agency says those who don't could be paying more in rollover fees.
“Our research suggests that state laws that require payday lenders to offer no-cost extended repayment plans are not working as intended,” said CFPB Director Rohit Chopra in announcing the agency’s recent findings. “Payday lenders have a powerful incentive to protect their revenue by steering borrowers into costly re-borrowing.”
What payday borrowers need to know up front
Out of the 26 states where payday lending is allowed, 16 states require payday lenders to offer no-cost extended payment plans – a scenario in which a borrower can repay just the principal and fees already incurred and split the remaining balance over several months. A borrower’s other, costlier option if they do not repay their loan on time is to rollover their loan. When the borrower chooses that route, their loan is renewed for another pay-period and the borrower is charged an additional payday loan fee.
The CFPB thinks consumers should know that the upsides of a no-cost extended payment plan can be substantial. As an example, the agency says a borrower would pay $45 in rollover fees every two weeks until they pay off the principal and fees on a typical $300 loan. That means a borrower would have paid $360 in rollover fees after four months while still owing the original $300.
However, if the same borrower chose a no-cost extended payment plan when the first rollover was triggered, they would only have to pay $345 over an extended period. In a previous study, CFPB researchers found that most payday loans were made to borrowers who use the rollover option so many times that the accrued fees were greater than the original principal.
Ask questions
When taking out a payday loan, there are several things a borrower should check. One of them is the lender’s disclosures. As they say, the devil is in the details, and the legalese in those disclosures may reveal some points that the lender may not offer when asking the borrower to sign on the dotted line.
One thing that should be in the disclosure is the borrower’s right to choose an extended payment plan when they're signing off on the loan. The CFPB says the contract language should spell out details of an extended payment plan, such as the right to repay the loan in several installments and that there will be no additional fees charged for an extended payment plan.
Other things to look for in a contract include details on "usage rates," whether or not the borrower is required to enroll in credit counseling to be eligible for an extended payment plan, and information on how many times a consumer can use an extended payment plan. As an example, Utah law restricts a consumer to one extended payment plan per 12-month period.
Can’t pay off your payday loan?
If worse comes to worst and borrowers can’t make good on their payday loan or are not given the option of an extended payment plan, the CFPB says there are some things they should do.
For example, you may wish to speak with a credit counselor in your area or contact a legal aid attorney to discuss your options. If you are a service member, contact your local Judge Advocate General’s (JAG) office to learn more. You can also use the JAG Legal Assistance Office locator to find help or ask your installation financial readiness office for information.
For more information about payday loan companies, ConsumerAffairs has created a guide that is available here.