CFPB issues important “white paper” on payday loans

The Consumer Financial Protection Bureau today issued what it's calling a "white paper on intial data findings" on Payday Loans and Deposit Advance Products. The report is chock full of statistics and charts based on what the agency found is actually happening in the payday loan industry. Who is taking out the loans? How often do payday loan borrowers take out payday loans? What are the principal sources of income of payday loan borrowers? How poor are the borrowers? What is the average length and amount of the loans? What are their payback terms? The report begins to answer these questions with real data. Here is an excerpt from the report's conclusion:

Payday loans and deposit advances are both structured as products designed to meet short-term credit needs, with the full amount borrowed due at the next payday in the case of payday loans and due as soon as sufficient qualifying electronic deposits are received (but no later than 35 days) in the case of deposit advances.

It appears these products may work for some consumers for whom an expense needs to be deferred for a short period of time. The key for the product to work as structured, however, is a sufficient cash flow which can be used to retire the debt within a short period of time.

The data presented in this study suggest some consumers use payday loans and deposit advances at relatively low to moderate levels. Thirteen percent of payday borrowers in our sample took out only 1-2 loans over the 12-month period, and about one-third took out six loans or less. A similar share of deposit advance users (30%) took no more than a total of $1,500 in advances over the same period of time.

However, these products may become harmful for consumers when they are used to make up for chronic cash flow shortages. We find that a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis, suggesting that they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter. Two-thirds of payday borrowers in our sample had 7 or more loans in a year. Most of the transactions conducted by consumers with 7 or more loans were taken within 14 days of a previous loan being paid back—frequently, the same day as a previous loan was repaid. Similarly, over half of deposit advance users in our sample took out advances totaling over $3,000. This group of deposit advance users tended to be indebted for over 40% of the year, with a median break between advance balance episodes of 12 days or less.


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