Payday loans, in theory at least, provide a solution to a problem in the market: Borrowers sometimes need small, short-term loans to pay for unexpected expenses. Car repair is the time-honored example often cited in these discussions. But a new report from the Consumer Financial Protection Bureau finds that, in practice, most borrowers aren’t in sudden jams. Instead, payday borrowers typically end up rolling old debts into new loans, often increasing how much they owe each time.
The bureau based the analysis on data for more than 12 million loans made in 2011 and 2012 and found that 80 percent of payday loans are essentially rolled over to a new payday loan within two weeks. “For most consumers, re-borrowing within 14 days means borrowing prior to receiving another paycheck after repaying the prior loan,” the CFPB wrote. Rolling over debts is a signal that the original loan may not have been affordable in the first place.
To look at whether borrowers daisy-chained loans to buy time, the bureau defined what it calls a “loan sequence,” which links together the original debt plus any later rollovers. Most borrowers take out only one sequence a year, so the sequence is a decent proxy for borrowers. About 36 percent of sequences operate how payday loans theoretically should: A borrower takes out one loan to cover a short-term debt and then repays it when it’s due, and roughly half of sequences are repaid with no more than one additional loan. Those borrowers probably aren’t too much of a concern for the CFPB. Yes, the loans may be expensive, but they’re not creating or enabling a situation where borrowers systematically take out more than they can realistically repay.
But that means the other half end up resulting in at least two extra loans—and often many more—with in excess of a quarter leading to at least six additional loans. Half of all loans are part of a cycle of rolling over debts at least 10 times. The number of loans is important, because each loan triggers new fees.
The bureau has been stepping up its oversight of the payday industry, which until recently had largely been regulated only at the state level. Two years ago it began supervising large payday firms and now takes complaints on payday debts, too. “We are now in the late stages of our considerations about how we can formulate new rules to bring needed reforms to this market,” CFPB Director Richard Cordray said today in a prepared speech.
With other consumer products, such as mortgages and credit cards, new regulations have placed some onus on lenders to determine whether a borrower has a reasonable ability to repay their debts. With findings like this, it’s not hard to imagine that the CFPB could focus on creating new regulations to impose the same logic on payday loans.