March 25, 2014 8:11 am
Updated: March 25, 2014 8:13 am

Payday loans create ‘debt traps’ for borrowers, study finds

A new study out of the United States finds that many payday loans are extended by the borrower, triggering new fees.

Kevin Van Paassen/Canadian Press

WASHINGTON – About half of all payday loans are made to people who extend the loans so many times they end up paying more in fees than the original amount they borrowed, a report by a U.S. federal watchdog has found.

The report released Tuesday by the U.S. Consumer Financial Protection Bureau also shows that four of five payday loans are extended, or “rolled over,” within 14 days. Additional fees are charged when loans are rolled over.

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Payday loans, also known as cash advances or check loans, are short-term loans at high interest rates, usually for $500 or less. They often are made to borrowers with weak credit or low incomes, and the storefront businesses often are located near military bases. The equivalent annual interest rates run to three digits.

The loans work this way: You need money today, but payday is a week or two away. You write a check dated for your payday and give it to the lender. You get your money, minus the interest fee. In two weeks, the lender cashes your check or charges you more interest to extend, or “roll over,” the loan for another two weeks.

The CFPB report was based on data from about 12 million payday loans in 30 states in 2011 and 2012. It also found that four of five payday borrowers either default on or extend a payday loan over the course of a year. Only 15 per cent of borrowers repay all their payday debts on time without re-borrowing within 14 days, and 64 per cent renew at least one loan one or more times, according to the report.

Twenty-two per cent of payday loans are extended by borrowers six times or more; 15 per cent are extended at least 10 times, the report found.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” CFPB Director Richard Cordray said in a statement.

Some states have imposed caps on interest rates charged by payday lenders.

The industry says payday loans provide a useful service to help people manage unexpected and temporary financial difficulties.

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