The majority of payday loan borrowers renew or roll over their loans multiple times in a row, according to a new report from the Consumer Financial Protection Bureau.
And that continued renewal means that some consumers end up paying more in fees than the amount of money initially borrowed, the CFPB says.
Concern over potential 'debt traps'
"We are concerned that too many borrowers slide into the debt traps that payday loans can become," CFPB Director Richard Cordray said in a statement about the latest study. "As we work to bring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind."
The report marks the CFPB's latest examination of the payday lending industry, which has come under increased scrutiny recently. In prepared remarks, Cordray signaled that the CFPB is close to establishing rules to crack down on the payday loan industry.
"I will frankly say that we are now in the late stages of our considerations about how we can formulate new rules to bring needed reforms to this market," Cordray said. He says he understands that small-dollar credit products can be useful to consumers, but adds that "we also need to recognize that loan products which routinely lead consumers into debt traps should have no place in their lives."
The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency already recently issued guidelines for banks that offer deposit advances, which are seen by many as similar to payday loans. And several months ago, Benjamin M. Lawsky, the New York Superintendent of Financial Services, filed cease and desists against 35 out-of-state online payday lenders for "unlawful activity."
Cycle of repeated borrowing
This latest CFPB report found that 80 percent of payday loans are rolled over or followed by another loan within 14 days. This cycle of repeated borrowing within two weeks doesn't appear to be affected much by some states' laws requiring a cooling-off period in between loans.
More than one-fifth of initial loans are renewed six or more times, the study found. In other words, that could mean a consumer takes out an initial loan and renews it six times, for a total sequence of seven loans, CFPB spokesman Sam Gilford said. Considering that a typical payday loan has a fee of 15 percent, by that seventh loan in the sequence, the person will have paid 105 percent of the original loan amount in interest, Gilford said.
On a more positive note, the study also found that about half of borrowers taking out an initial loan are able to repay the loan with no more than one renewal.
"Our central concern here is not with every payday loan made to a consumer," Cordray said. "Preserving access to small-dollar loans does mean, after all, that some such loans should be available. Our concern instead is that all too often, those loans lead to a perpetuating sequence."
Have you ever taken out a payday loan? Are there restrictions or safeguards you think the government should put in place on these products?
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