By Pete Rizzo (@pete_rizzo_)
The actual cost of lump-sum payday loans bears little resemblance to the advertised terms, a newly released October report from the Pew Charitable Trusts concluded. Lump-sum payday loans often require borrowers, typically those who have been deemed too risky for traditional loan offerings, to pay the full value of the loan by their next payday.
The third in a series of Pew reports on payday lending in the U.S., the study found that the nation’s 12 million annual payday loan borrowers often aren’t able to meet their loan obligations, spending on average $520 in interest to secure just $375 in borrowing.
“Repeat borrowing is the norm, because customers usually cannot afford to pay the loans off on payday and cover their other expenses, so they repeatedly pay fees to renew or reborrow the money for an average of five months of the year,” Pew wrote.
Pew added that this activity was prevalent in all 35 states that allow this type of lump-sum repayment loan.
As illustrated in our latest Interactive Infographic, conventional payday loans take a large percentage of borrowers’ bi-weekly gross income in states across the U.S. Borrowers in dark-blue states lose between 30 and 39 percent of this income to payday loan costs, while costs consume 16 to 29 percent of bi-weekly paychecks in medium-blue states.
In Colorado, where new regulations are impacting the market, payday loan borrowers pay an average of 4 percent of their bi-weekly paychecks to lenders.
While that’s good news, the flip side of this story is that these regulations are forcing out short-term lenders to the detriment of consumers who have no other outlet available to them to borrow needed funds.
While the number of consumers who make use of these loans dropped by 15 percent since the regulation was enacted. The number of providers declined by 53 percent during this time. Further, Pew concluded that Colorado payday loans “remain costly.” However, it did state that the regulation has led state borrowers to spend 42 percent less than they did under old laws, but with far fewer outlets from which to access short term credit.
For more information on payday lending in the U.S., download a full copy of Pew’s “Payday Lending in America: Policy Solutions” here.