The Payday Loan Cycle
A payday loan cycle is definitely tough to get out of, as the Consumer Financial Protection Bureau (CFPB) proved with a March 25, 2014 report on the payday loan industry. The CFPB report says that 80 percent of all payday loans are rolled over or renewed within 14 days and that the original loan principal is unlikely to be paid up during these payday loan cycles.
The report builds upon the CFPB’s 2013 research, which depicts that the average length of a payday loan cycle is 195 days, or 54 percent of the year.
“Repeat borrowing is a symptom of a borrower’s fundamental inability to repay a payday loan,” said Tom Feltner, director of financial services at the Consumer Federation of America, in a press release. “We need the CFPB to issue a strong rule to ensure that short-term credit doesn’t become a long-term problem.”
In addition, the 2014 report found that 15 percent of new loans end up in a payday loan cycle at least 10 loans long.
“Regardless of the term or structure of a payday loan, if back-to-back usage is frequent and lenders direct access to a bank account, borrowers are at risk,” said Feltner. “Ability to repay, not the ability to collect, should be the standard going forward.”
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