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Beware of payday loans.
A new report by the Consumer Financial Protection Bureau finds that more than 60 percent of payday loans are made to people who end up extending the loans several times. In the end, borrowers end up paying more in fees than the original loan amount.
And 4 out of 5 payday loans, also known as cash advances or check loans, are rolled over for an additional fee or followed by another loan within just two weeks, USA Today reports.
“This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden,” said CFPB director Richard Cordray. “For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates.”
Bloomberg Businessweek said that after factoring in fees, interest rates on payday loans can skyrocket to 521 percent on an annual basis, and leave borrowers in a perpetual state of indebtedness. (See: “Big Banks Are Dropping Their Payday-Type Loans.”)
The CFPB is drafting new rules to reform the payday loan market, which is definitely a step in the right direction. Cordray said that payday loans should help borrowers get ahead, “not push them farther behind.”
The payday loan industry claims that the loans are meant to be an effective service to help people to manage temporary or unexpected financial challenges.
My first TV reporting job after graduating from college paid $6 per hour, just above minimum wage at the time, so I lived precariously from paycheck to paycheck. If any unexpected expense arose, like my brakes went out or I needed new tires for my car, I took out a payday loan to help cover the extra expense.
But I quickly discovered that paying the interest on a short-term loan left me with no money after my next paycheck, and then I’d have to take out another payday loan just to cover my basic expenses. It was a vicious cycle, so I’m thrilled to see the feds taking a closer look at these predatory loans.
Do you have any experience with payday loans? Please share them below or on our Facebook page.