The Existing Payday Loan Debt Trap

In the traditional retail model, borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower’s next payday. The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower does not repay the loan in person, the lender may redeem the check or take title to the collateral. If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay.

 

Title Loan Amount $950.00
Title Loan Rollover Fee/Mo $237.50
Months to Retire Loan 10
Monthly Total: $332.50
Interest and Fees $2,375.00 ($237.50 x 10)
Payday Loan Amount $375.00
Payday Loan Rollover Fee $60.00 ($30.00 x 2)
Monthly Interest $93.75 (300%)
Monthly Total: $153.75
Interest & Fees $1,537.50 ($163.75 x 10)
WageBank Paycard* $0.00
WageBank Transfer Fee $5.00 ($5.00 x 10)
Online Balance Inquiry $0.00
Signature Transaction Fee $0.00
PIN Transaction Fee $2.00 ($0.50 x 4 x 12)
Allpoint ATM Fee (2 free per month**) $4.00 ($2.00 x 2 x 12)
Annual WageBank Cost $122.00

Short Term Liquidity Impact

Payday loan fees exceed $7.4 billion annually at 20,000 storefronts and hundreds of websites. Bank overdraft fees exceeded $32 billion. These loans are a highly controversial form of credit. Borrowers find fast relief but often struggle for months to repay obligations marketed to bridge until payday. While  proponents argue  that payday  lending  is a vital way to help underserved people solve temporary cash-flow problems, opponents claim that the practice preys on overburdened employees with expensive debt that is usually impossible to retire on the borrower’s next payday.

Fast Facts

69% use the funds to cover a “normal” expense* Only one in seven can retire the loan as originated*

52% overdrafted their checking accounts last year, 27% of those cited the loan as the reason*

41% needed a cash infusion to pay off their loan* 12 million employees use a payday loan each year*

66% have a household income of less than $30,000**

*pewtrust.org/small-loans

**consumerist.com/2013/04/26