Why Pay-Day Loans Create Financial Problems
Tacoma and Pierce County Bankruptcy Attorney
The March, 2014, report issued by the Consumer Financial Protection Bureau indicates that consumers’ use of payday loans often turns into a long-term problem.
Key findings of this report include:
- Over 80% of payday loans are rolled over or followed by another loan within 14 days (i.e., renewed). Same-day renewals are less frequent in states with mandated cooling-off periods, but 14-day renewal rates in states with cooling-off periods are nearly identical to states without these limitations.
- While many loan sequences end quickly, 15% of new loans are followed by a loan sequence at least 10 loans long. Half of all loans are in a sequence at least 10 loans long.
- Few borrowers amortize, or have reductions in principal amounts, between the first and last loan of a loan sequence. For more than 80% of the loan sequences that last for more than one loan, the last loan is the same size as or larger than the first loan in the sequence. Loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates.
- Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer. Among new borrowers (i.e., those who did not have a payday loan at the beginning the year covered by the data) 22% of borrowers paid monthly averaged at least one loan per pay period. The majority of monthly borrowers are government benefits recipients.
This means that payday loans generally are not used by customers as short-term “stopgap” loans to keep them out of a cycle of debt. Rather, customers are in debt effectively for months, with interest rates exceeding 100% – 500%. This could result in over $1,000 of fees to borrow $100 for twenty weeks.
Fortunately, bankruptcy relief is available to help individuals escape from the payday loan cycle. Call Washington Fresh Start at (253) 284-9909 to speak with a Tacoma bankruptcy lawyer and find out how you can obtain a fresh financial start.