Payday loans are big business in the United States and a big danger to consumers. The Consumer Financial Protection Bureau (CFPB) loosely defines a payday loan as a short-term, high cost loan that is generally due on your next payday. These loans are typically $500 or less but end up costing borrowers a great deal more in interest and fees.
According to thepennyhoarder.com, approximately 12 million Americans utilize payday advances annually. White women aged 25 to 44 utilize this lending the most often. Most borrowers earn less than $40,000 per year and most have less than a four-year college degree. African Americans are also frequent borrowers.
Payday advances are available in most states both through storefront lenders, making access quick and easy.
The median loan amount is $350 with a median fee of $15 per $100 borrowed on a 14-day loan. This amounts to $50-$55 over this very short term. If there are insufficient funds in your account when the lender attempts to extract payment then borrowers will be charged additional penalty fees from both the payday lender and their own financial institution. If a borrower is unable to repay the loan, they are pulled into a vicious cycle of mounting debt, fees and interest and become subject to aggressive collection tactics.
Thankfully, some states do offer some protection from exorbitant loan fees. Laws pertaining to short term loans vary from state to state with some states prohibiting them entirely. While payday loans are often structured to be paid off in one lump sum, some state laws allow lenders to rollover or renew a loan when it comes due thereby keeping the borrower in debt and charging additional fees. Some loans are structured to be repaid in installments over time.
Many states also regulate the amount of interest that can be charged by instituting an interest rate cap on short term lending. According to CNBC, Ohio had the highest average interest rates at a whopping 667 percent until enacting legislation in 2018 that capped the state’s allowable payday loan rate at 60 percent—still a great deal higher than typical credit card APRs. The average interest rate on payday loans in the United States is 400 percent.
In addition to protections afforded by some state laws, the Military Lending Act (MLA) protects active duty service members and their dependents from unscrupulous lenders by capping the Military Annual Percentage Rate (MAPR) at 36 percent and by regulating other fees payday lenders may charge to military members and their families.
These easy access loans seemingly provide a quick fix in a desperate situation. In reality they can spiral borrowers into a mountain of debt very quickly. Although a lucrative venue for lenders, it is crucial that regulations are in place to monitor and control the industry and to protect vulnerable populations.