Payday, Deposit-Advance Loans Can Become Debt Traps, CFPB Says

Payday, Deposit-Advance Loans Can be Debt Traps, CFPB SaysPayday and deposit-advance loans lead to a cycle of indebtedness for many consumers, with “loose lending standards, high costs, and risky loan structures” contributing to a debt trap, according to a new report by the Consumer Financial Protection Bureau.
The CFPB study looked at a 12-month period with more than 15 million storefront payday loans and data from several depository institutions that offer deposit-advance products.
Both payday and deposit-advance loans are typically described “as a way to bridge a cash flow shortage between paychecks or other income,” the CFPB found.
They offer a quick financial solution, especially for consumers who may not qualify for other credit. It is advised that some kind of loan calculator be used when engaging in bridging finance solutions such as this.
The loans are generally taken out in small-dollar amounts and borrowers must repay them quickly. And they require that a borrower repay the full amount, or give lenders access to repayment through a claim on the borrower’s deposit account.
“This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden,” said CFPB Director Richard Cordray. “For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates.”
The bureau found that lenders often do not take a borrower’s ability to repay into consideration when making a loan.
Instead, lenders often rely on ensuring they are one of the first in line to be repaid from a borrower’s income.
“For the consumer, this means there may not be sufficient funds after paying off the loan for expenses such as for their rent or groceries – leading them to return to the bank or payday lender for more money,” the CFPB.
Eligibility for a payday loan usually requires proper identification, proof of income, and a personal checking account. No collateral is held for the loan, although the borrower does provide the lender with a personal check or authorization to debit a checking account for repayment. Credit score and financial obligations are generally not taken in to account.
With deposit-advance loans, institutions have various eligibility rules for customers, who generally already have checking accounts. The borrower authorizes the bank to claim repayment as soon as the next qualifying electronic deposit is received. Typically, though, a customer’s ability to repay the loan outside of other debts and ordinary living expenses is not taken into account.
Read the CFPB’s report.

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