Payday loans are marketed as a quick-fix loan to help families during a financial emergency. Instead, these high-cost loans trap borrowers in a cycle of debt. Last year, California families paid more than $578 million in fees alone.
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State Rep. Patricia Todd knew something was wrong when a woman who was a tenant in AIDS Alabama’s housing quit paying rent. Todd, who supervises that program, finally got the tenant to tell her what had happened.
The woman’s car had broken down, and the repair bill was $300. Not having the money, she took out a payday loan. Todd said the woman explained that she then could not repay the loan and interest without renewing the loan – and a cycle began. By the time Todd talked to her, the debt had grown.
“She ended up with five [payday loans] to the tune of $2,500 for a $300 loan,” Todd, (D-Birmingham), said. With Todd’s advice, the tenant managed to work her way out of debt, including not repaying two online loans from companies that were not licensed to do business in Alabama.
You need money—$300 to be exact. You feel like you have no alternative, and the cash on those billboards is inviting.
So you visit a payday loan outlet.
Find out the annual interest rate for that $300 payday loan.”
The Consumer Financial Protection Bureau—the federal regulator charged with setting new rules for these types of loans—has proposed a new regulatory framework and is currently working to finalize it. In the near future, states that allow these loans today will have a choice to make: Prohibit such loans entirely or substantially reform them to meet or exceed federal standards.
Fourteen states and the District of Columbia ban payday lending, but lenders continue to find ways to offer online payday loans to residents of these states as well as others around the country.
Typically advertised as short-term, emergency loans, payday loans keep borrowers in debt for an average of five months. Online loans are especially risky, with average APRs (annual percentage rates) of 650 percent compared to 391 percent at local stores.
Conventional storefront payday lenders such as Advance America and Cash America have entered the online market, advertising quick cash for emergencies, along with a new class of online-only entities. These new lenders offer two-week payday loans as well as longer-term installment loans and secure the loans with electronic access to a borrower’s checking account. These loans are often underwritten using algorithms designed to predict defaults, weed out fraud, which lenders claim will lower prices.
