Magazine article American Banker

Many Hooked on Payday Loans, Study Finds

Magazine article American Banker

Many Hooked on Payday Loans, Study Finds

Article excerpt

Despite the protestations of payday lenders, many of their customers borrow from them again and again and again, according to a Chicago nonprofit.

The industry says its loans -- which carry fees averaging 20% -- are intended to be occasional, short-term fixes for consumers with cash flow problems.

But in a report last week the Woodstock Institute said many payday borrowers, unable to repay, roll their loans over regularly, paying huge sums in fees.

Payday lending has attracted interest from banks -- and from regulators and legislators. In return for fast cash, the borrower writes a check that the lender agrees not to cash until the borrower's next paycheck arrives.

Critics have said the practice exploits the poor and traps them in a cycle of debt. Twenty percent fees on payday loans taken every pay period would equal an annual interest rate of more than 500%, the Woodstock Institute said.

The industry's newly formed trade group, the Consumer Financial Services Association of America, initiated a campaign in January to improve payday lenders' image.

The group said in promotional materials that the customers of its 48 member-companies are generally middle-class people, with incomes of $25,000 to $45,000, who "are making an informed short-term cash flow decision."

Because the payday loan is a short-term transaction, the group said, it is unfair to compare it on annualized percentage rate basis with other types of consumer loans.

But the Woodstock Institute, citing data from the Illinois Department of Financial Institutions, said that payday borrowers are disproportionately lower-income, and that many in fact are repeat customers.

Illinois and some other states limit the number of times a borrower can extend a payday loan, but there is no mandated waiting period between loans, the Woodstock Institute noted. …

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