The Consumer Financial Protection Bureau (CFPB) has issued a new report on payday lending, finding that four out of five payday loans are rolled over or renewed within 14 days. The study also shows that the majority of all payday loans are made to borrowers who renew their loans so many times that they end up paying more in fees than the amount of money they originally borrowed.
"We are concerned that too many borrowers slide into the debt traps that payday loans can become," said CFPB Director Richard Cordray. "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."
Payday loans are typically described as a way to bridge a cash flow shortage between paychecks or other income. Also known as "cash advances" or "check loans," they are usually expensive, small-dollar loans, of generally $500 or less. They can offer quick and easy accessibility, especially for consumers who may not qualify for other credit.
Today's report is based on data from a 12-month period with more than 12 million storefront payday loans. It is a continuation of the work in last year's CFPB report on Payday Loans and Deposit Advance Products, one of the most comprehensive studies ever undertaken on the market. That report raised questions about the loose lending standards, high costs, and risky loan structures that may contribute to the sustained use of these products.
Today's report provides a deeper analysis of the data, focusing on repeated borrowing by consumers after they take out an initial payday loan. A primary driver of the cost of payday loans is that consumers may roll over the loans or engage in re-borrowing within a short window of time after repaying their first loan. Today's study looks at not only the initial loans but also loans taken out within 14 days of paying off the old loans; it considers these subsequent loans to be renewals and part of the same "loan sequence." Today's study is the most in-depth analysis of this pattern to date.