Resources


Payday Loans Artificially Create Their Own Demand

A new study released by the North Carolina-based Center for Responsible Lending finds that most of the demand for payday loans has been artificially created by the industry. The July 2009 report, entitled Phantom Demand: Short Term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume, describes how payday loans essentially “churn” consumer demand for new payday loans.  The high fee short-term loans cause many borrowers to take a new payday loan almost immediately after repayment because they are left with inadequate funds to meet other needs.

According to the study, 50 percent of all payday loans are taken by borrowers within one day after paying off an old loan, and 76 percent of payday loans are taken within two weeks of repayment.  CRL found that in the U.S., this churning artificially creates demand for the product and inflates payday loan volume.

The report directly contradicts a common lending industry claim that payday loans are a short-term product used to meet occasional emergency needs.  In fact, CRL found that only 2 percent of all loans are taken by non-repeat borrowers.  The frequent and repeat borrowing traps consumers in a recurring cycle of debt that is difficult to leave. 

Payday lenders clearly recognize the importance of repeat borrowers.  Many offer free or highly discounted first loans to attract new customers with the goal of converting them to long-term borrowers.  CRL estimates that nearly 59 million payday loans totaling $20 billion are a product of churning.  

»Read the report

Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in California

That's the title of a new report by the Center for Responsible Lending, and it says that racial and racial and ethnic composition of a neighborhood is the primary predictor of payday lending locations. In comparison, racial and ethnic composition play a very minimal role in explaining the variation in the location of bank branches.

As a result, the study says, payday lending storefronts are most heavily concentrated in African American and Latino communities. By contrast, the location of mainstream financial service providers such as banks can be largely explained by supply and demand factors such as the presence of retail space.

»Read the report

APR – Annual Percentage Rate

Payday lenders say it is unfair to measure their loans by an annual rate. But Congress developed APR so that consumers can compare all kinds of credit options. Read the latest issue brief from the Center for Responsible Lending – and learn how payday lenders objected to requirements by the Federal Reserve Board.

»Read full issue brief

Wealth-stripping payday loans trouble communities of color
People of color have less wealth than their white counterparts, making them more vulnerable to predatory lending. This, in turn, threatens to further widen the wealth gap.

»Read full issue brief

Payment plan smokescreen
In states that have legislated these guidelines, the debt trap persists. Nearly two of every three loans still go to borrowers with twelve or more loans per year and less than one percent of transactions use the "mandatory" payment plan.

»Read full issue brief

Springing the debt trap
States approach payday lending in one of three ways. Some allow payday lenders to operate with virtually no legal restrictions. Others enforce an interest rate cap at or around 36 percent on small loans, inclusive of payday lending. And a third group attempts to create a middle ground where payday lenders can charge triple-digit interest rates with certain restrictions intended to make sure that payday loans don’t create a debt trap for borrowers.

»Read full issue brief

North Carolina Consumers after Payday Lending: Attitudes and Experiences with Credit Options
Prepared for the North Carolina Commissioner of Banks
(2007)

This study was undertaken at the request of the North Carolina Office of the Commissioner of Banks to assess the situation facing households in the credit market since the end of legal payday lending in North Carolina. What effect has de-authorization of payday lending had on low- and middle-income working households? Do adequate alternatives exist? What alternatives are most commonly used, and how do they compare to payday loans? Ultimately, are North Carolina residents better off without payday lending?

Our research concludes that the absence of storefront payday lending has not made a significant impact on credit availability in North Carolina. For those impacted, over twice as many report that the absence of payday lending has had a positive effect on their household rather than a negative one. There was broad agreement that there is a need for short-term consumer credit that is more affordable and manageable than a payday loan.

»Read full issue brief

Financial Quicksand:
Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year
(2006)

America’s working familiespay billions of dollars in excessive fees every year, as payday lenders across the nation routinely flip small cash advances into long-term, high-cost loans with annual interest rates in the range of 400 ercent.

Based on data collected by state regulators, financial records released by payday lenders, and assessments by third-party analysts, we update here our 2003 quantification of the cost of predatory payday lending to American families. Breaking down the impact by state, we also calculate the savings to families in states that have banned payday lending.

»Read full issue brief

400 Percent APR — Is That Good?
Do people take out payday loans because they're desperate — or because they don't understand the terms?

By Ray Fisman, Slate
July 22, 2009

There's been a lot of finger-pointing lately about who is to blame for the untenable financial circumstances of many American families. Among the usual suspects — Wall Street quants, fly-by-night mortgage brokers, the households themselves — none is an easier target than payday lenders. These storefront loan sharks are portrayed by their detractors as swindlers preying on the desperation and ignorance of the poor. A payday backlash is already well underway — Ohio recently passed legislation capping interest rates at 28 percent per year, and the Military Personnel Act limits interest charged to military personnel and their families to 36 percent. The average payday loan has an annual interest rate of more than 400 percent.

Payday lenders themselves argue that they're being victimized for providing a critical social service, helping the hard-up put food on the table and cover the rent until their next paychecks. Charging what seem like usurious interest rates, they claim, is the only way to cover the cost of making $100 loans to high-risk borrowers.

If payday lenders really do provide a much-needed financial resource, why deprive Ohioans and American servicemen of this service? A recent study by University of Chicago economists Marianne Bertrand and Adaire Morse suggests there might be a middle ground, by allowing payday lenders to continue making loans but requiring them to better explain their long-term financial cost. In a nationwide experiment, Bertrand and Morse found that providing a clear and tangible description of a loan's cost reduced the number of applicants choosing to take payday loans by as much as 10 percent. Better information, it turns out, may dissuade borrowers vulnerable to the lure of quick cash while maintaining the option of immediate financing for those truly in need.

»Read more about the study