WASHINGTON – A report by a federal watchdog found that about half of all payday loans are made to people who extend the loans so many times that they end up paying more in fees than the original amount borrowed.
The report released Tuesday by the Consumer Financial Protection Bureau also shows that four of the five payday loans are extended, or “rolled over”, within 14 days. Additional fees are charged when loans are renewed.
“We are concerned that too many borrowers are falling into the debt traps that payday loans can become,” CFPB director Richard Cordray said in a written statement. He said reforms were needed to ensure Americans have access to other more consumer-friendly “small loans” that would help them get ahead of their debts instead of delaying them.
Payday loans, also known as cash advances or check loans, are short-term loans with high interest rates, typically $ 500 or less. They are often intended for borrowers with poor credit or low income, and window stores are often located near military bases. The equivalent annual interest rates run in three digits.
The report also found that only 15% of borrowers who take out payday loans are able to repay the loan on time, without taking out another loan within 14 days. The remaining 85% either default on the original loan or take on a new one, trapping them in a never-ending cycle of debt.