If you’re in a jam, payday loans promise to be a quick-fix solution. In exchange for absurd interest rates equating to 450% and up, a borrower can get a short-term loan that’ll be paid back in the near future (once the borrower reaches “payday”). While the terms may seem outrageous enough for consumers to want to avoid these loans whenever possible, at least borrowers are on the hook for a very brief time period, and the loans are one-time solutions, right? Actually, wrong.
A new study from the Center for Responsible Lending tracked the financials of roughly 11,000 consumers in Oklahoma who used payday loans over the course of two years, starting in 2006. The majority of these borrowers remain indebted for the full time period because of a vicious cycle: First, the customer borrows to cover a financial shortfall. He pays off that loan soon after receiving a paycheck, but in the course of paying off the loan and its substantial interest, that puts the customer in a tough spot the month after the initial loan. So how does he pay the bills? By taking out another payday loan. Lather, rinse, repeat. If a borrower is late paying back a payday loan, fees kick in, making that loan harder to pay off—and increasing the chances of another financial shortfall down the line.
The CRL study shows that not only does this cycle tend to keep many payday borrowers in debt month after month, but the size of the loan grows over time as well. Whereas the average initial payday loan was $279 in the study, the overall average indebtedness per borrower was $466.
In the study’s conclusions, the CRL states flatly that while payday loans are technically short-term products, in reality they are anything but:
Borrowers are misled by the promise of a short-term credit product when it is in fact designed and functions to keep them indebted for extended periods.
Repeat borrowing is the norm, not the exception.
The truth is that a “one-time fix” can lead to a cycle of debt that might not be paid off for a really long time.