More than 80 percent of all payday loans are taken out as part of an expensive, dead-end cycle of borrowing, according to a new report from the Consumer Financial Protection Bureau (CFPB).
The report separates new borrowing from repeated payday loans, and finds that roughly 45 percent of new loans end up getting renewed multiple times before they are paid off. One in seven gets renewed 10 or more times. The industry relies on these repeat borrowers for the vast majority of its business. More than four in five loans was part of one of these misery cycles in which a borrower is unable to get out of debt. Given that each new loan incurs a 15 percent fee, the volume of lending to these repeat borrowers is accounting for the vast majority of lender income.
The industry “depends on people becoming stuck in these loans for the long term,” CFPB head Richard Cordray said Tuesday in Nashville. Lenders hoping to avoid regulation will point to the report’s finding that a little more than half of all newly originated payday loans do not end up in the hopeless repeat borrowing cycles that have drawn criticism and regulators to the industry. But the report shows the industry makes its money “from people who are basically paying high-cost rent on the amount of their original loan,” Cordray said.
The report is an unprecedented snapshot of what the marketplace for high-fee, high-interest short-term loans really looks like. The agency looked at anonymized data from payday lending companies — the sort of market data collection that CFPB opponents have likened to gestapo surveillance in Nazi Germany — that makes it possible to separate newly initiated payday loans from patterns of repeat borrowing that the report calls “loan sequences.” Differentiating between customers who take out and quickly repay one loan from those who end up chronically indebted to the same lenders allows the agency to see consumer and lender behavior much more clearly. That information will play a significant role in shaping the ongoing policy debate over how payday lenders should be regulated at both the state and national level.
Rather than fretting over every single payday loan, Cordray said Tuesday, the agency is focused on cases where “the subsequent loans are prompted by a single need for money — that is, the follow-on loans are taken out to pay off the same initial debt for the consumer.” Customers who quickly repay the loan that let them keep their car in good repair or pay an unexpected hospital bill are probably getting a good deal. When a person instead gets stuck rolling that debt over without ever paying it down, “that is where the consumer ends up being hurt rather than helped by this extremely high-cost loan product,” Cordray said.
This quantitative confirmation of the predatory nature of payday lending could add momentum to the ongoing push for stricter oversight of the industry. The report shows both that there is indeed a sincere demand for this kind of short-term loan product and also that the companies currently satisfying that demand get their money from trapping a sizable number of their customers in perpetual debt. Those facts strengthen the hand of those who want to empower the post office to offer these same sorts of loans without charging usury rates. It should also discourage legislators in Pennsylvania from inviting payday lenders back into their state, and embolden supporters of a crackdown on payday lending in a variety of other states.