Most Payday Lenders Direct Borrowers To Higher-Cost Payment Options, CFPB Says

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Most payday loan borrowers aren’t using the lowest-cost payment option in states where it’s available, perpetuating a cycle of high fees and high debt, the Consumer Financial Protection Bureau said Wednesday. a report.

In some cases, payday lenders have withheld information about these “no-cost extended payment plans” from borrowers to generate more revenue, the federal agency said.

The Dodd-Frank Act established the CFPB in the wake of the Great Recession to protect consumers from unfair, abusive and deceptive financial practices.

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“Our investigation suggests that state laws requiring payday lenders to offer extended payment plans at no cost are not working as intended,” Rohit Chopra, director of the office, said in a written statement. “Payday lenders have a powerful incentive to protect their income by luring borrowers into an expensive new loan.”

The Community Financial Services Association of America, a trade group that represents payday lenders, did not respond to a request for comment by press time.

Payday loans are generally short-term, high-cost loans that are due in one payment on the borrower’s next payday.

Such lending is allowed in 26 states and more than 12 million people borrow each year, according to the CFPB.

Rohit Chopra, director of the Consumer Financial Protection Bureau.

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The average payday loan is about $350, and the typical fee amounts to an average interest rate of 391%, according to the CFPB.

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Those who cannot pay on time can pay a fee to extend their due date through a “transfer”. The rollover fee does not count towards the principal of the loan. The rollovers can serve to keep payday borrowers in debt, the CFPB said.

Sixteen states require lenders to offer “no-cost extended payment plans” as an alternative, the CFPB said. These plans allow borrowers to pay off their loan in multiple installments instead of a single payment, the CFPB said.

Here’s a comparison of the two types of CFPB payment options: someone taking out a typical $300 loan would pay $45 every two weeks to renew the loan; after four months, they would have paid $360 in rollover fees and still owed the original $300. If the same person initially chooses the no-cost payment plan, she would pay a total of $345 during that period.

But these payment plans are little used in the states where they are available, according to the report, which the CFPB believes is the first to compare usage across states.

For example, usage rates range from less than 1% percent of borrowers in Florida to 13.4% in Washington state, according to the report.

“Despite the prevalence of state laws providing for extended payment plans at no cost, data shows that rollover and default rates consistently exceed extended payment plan usage rates,” the agency wrote. “The Bureau has observed that monetary incentives encourage lenders to promote higher-cost reinvestments at the expense of extended payment plans.”