This week the Consumer Financial Protection Bureau focused on those little loans that come with triple-digit lending rates: payday loans. On March CFPB convened a public forum in Nashville that coincided with the Bureau’s release of a new research report. After analyzing 11 months of borrowing at 12 million storefront locations, CFPB’s findings again confirm that the industry relies not on individual borrowers’ ability to quickly repay, but on their inability to repay, resulting in individual borrowers taking out many loans each year.
In other words, the business model for payday lending is a debt trap. With numerous storefronts often concentrated in communities of color, many consumers are drawn in by convenient locations and promises of quick cash with no credit checks. All too often, borrowers discover that the terms of the small dollar loan cause even more financial stress and deepening debt.
Commenting on the Bureau’s payday loan focus, Director Richard Cordray said, “Our concern is that all too often those loans lead to a perpetuating sequence. That is where the consumer ends up being hurt rather than helped by this extremely high-cost loan product.”
Unlike most lenders, the payday industry needs and relies upon customers who cannot repay their loans. For every payday borrower who must renew a loan, the lender can then with each renewal charge more lucrative fees. In many cases, borrowers are repaying more in fees alone than they initially received from the loan.
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