Philadelphia Inquirer: CFPB: Payday Loans Leading to 'Revolving Door of Debt'
Short-term "payday" loans, and similar "deposit advance" loans offered by major banks, are trapping many consumers in a "revolving door of debt," according to a study due to be made public Wednesday by the Consumer Financial Protection Bureau.
Although it did not announce specific plans, the bureau signaled its intention to intervene in the market for the short-term, high-cost loans, which have stirred years of controversy in state capitals and among consumer advocates. Although payday loans' costs are typically represented as fees rather than interest, the report said the costs are often equivalent to an annual percentage rate, or APR, topping 300 or 400 percent.
In a briefing for journalists, CFPB Richard Cordray said the bureau found disturbing patterns when it looked at a sample of about 15 million loans in 33 states - in particular, evidence that a majority of the loans went to borrowers whose behavior belied the industry's claims that it largely helps consumers with occasional cash-flow problems. He said that from a consumer's standpoint, there was little difference between traditional payday loans and deposit-advance loans.
With both products, "there is high sustained use, which we consider to be not only when a consumer rolls over the loan, but also when he pays it off and returns very quickly to take on another one," Cordray said. He said the median payday borrower took out 10 loans a year and paid $458 in fees. Among deposit-advance borrowers, "more than half took advances totaling $3,000 or more, and of these borrowers, more than half paid off one loan and went back for another within 12 days."
The CFPB's study echoes findings in a February report by the Pew Charitable Trusts' Safe Small Dollar Loans Research Project. Pew said 58 percent of payday loan borrowers had trouble meeting monthly expenses at least half the time because they "are dealing with persistent cash shortfalls rather than temporary emergencies." Pew said juat 14 percent of borrowers "can afford enough out of their monthly budgets to repay an average payday loan."
Pew's report said payday borrowing "is largely driven by unrealistic expectations and by desperation."
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