Five Things You Need to Know About Payday Lending

You probably think those “fast-cash” places are shady. Well, you’re not wrong.

Maybe you’ve seen the ads on TV, or on the side of a bus, promising “fast cash” or “money when you need it.” Payday lenders market their product as a “quick fix” for people who need a little help getting from paycheck to paycheck. But in reality, payday loans are among the most predatory forms of credit on the market, taking advantage of people who are already struggling uphill, trapping them in long cycles of debt, and extracting crazy interest rates all along the way.

On June 2nd, the Consumer Financial Protection Bureau — the consumer watchdog agency set up by Elizabeth Warren — issued long-awaited proposed rules to rein in the worst abuses of payday lenders. Here’s what you need to know about payday lending to understand exactly why strong regulations are necessary.

  1. Payday Loans Are Deliberately Designed as Debt Traps
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Payday loans are deliberately designed as debt traps.

Here’s how the trap works: First, payday lenders market their product as an easy, quick, and simple fix to a short-term budget gap, with “reasonable” fees. But, the catch is that borrowers have to repay their payday loan in full just weeks after they take it out (and not — like most other types of loans — in small pieces over time). Since most people who had a budget gap to begin with still have that gap a few weeks later, , often using new loans to repay the old.

2. Lump Sum Repayment Is Practically Impossible for Most Borrowers, and Lenders Know It

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Lenders know that most borrowers will not be able to repay their payday loan in full, on time.

Unlike most other forms of debt, payday loans are supposed to repaid in full just a few weeks after the loan is taken out. But for the average payday borrower, there’s almost no chance of that happening. Payday borrowers typically , and a $400 loan repayment would break their budget.

Of course, payday lenders know this when they issue the loans. In fact, they are counting on it. When a $400 repayment is out of the question, borrowers end up paying another $50 in fees to extend the term of the loan or take out a new loan to cover the old. And the kicker is that none of those additional fees go toward paying down the actual amount of the original loan.

3. The Fees and Interest Charges on Payday Loans Are Astounding

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The typical payday borrower ends up paying more in fees than the amount of the original loan.

. At first glance, that might seem comparable to something like a credit card’s rate, but it’s really not. For one thing, the term of a payday loan is often only two weeks, whereas a credit card rate is calculated over the course of an entire year. Using an apples-to-apples comparison, .

On top of that, while stuck in the trap of payday loans, most borrowers end up paying fee after fee after fee. All those “reasonable” fees add up pretty quickly. In fact, , paying more than twice as much in fees as the amount of the original loan.

4. The Business Model of Payday Lending Depends on Trapping People

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Payday lenders make nearly all of their profits from borrowers who are trapped in a cycle of seemingly never ending loans.

Not only do payday lenders understand that their product is a trap, they depend on it. “The theory in the business,” says Dan Feehan, the CEO of Cash America, “” Feehan wasn’t exaggerating.

5. Payday Lenders Deliberately Target Communities of Color

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It’s not just about income. Payday lenders disproportionately target communities of color.

Multiple studies from across the United States have shown that payday lending storefronts tend to pop up in neighborhoods where African Americans and Latinos live. This is true even after accounting for differences in average income. A study in Florida, for example, found that even looking at only higher-income neighborhoods, payday stores were .

6. Bonus Thing You Need to Know: You Can Do Something About This

The rules proposed by the Consumer Financial Protection Bureau are a step in the right direction, but they certainly could be stronger. Not only that, they are just proposed rules and aren’t even final. The CFPB is currently asking for public comments on their proposed rules. We can be sure that the payday industry is throwing everything they have at the CFPB to try to weaken or undermine the final regulations. Americans who want to see a strong final CFPB rule must speak up.

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Submit a comment in support of a strong rule by going to

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