HOUSTON, TX – It’s the American way of life. Debt. But new numbers from the Consumer Financial Protection Bureau are shining light on one of the banking world’s gray areas: payday loans.
“The way payday lending works is that you must repay that loan within the next term and the term is on a two-week basis,” Tom Staley with Consumer Credit Capital explains.
Four out of five people who take out short-term, payday loans end up taking out another when they can’t payoff the first. Then another to pay off the second. It’s what the Protection Bureau calls “the revolving door of debt.” And once you’re in, getting out can be tough.
“Most of the people that didn’t have the $1,000 in the first place don’t have the wherewithal to pay pack that $1,000 plus $250 within two weeks,” Staley says, “so what the industry does is: they roll over that loan. What that means is you’ll extend the obligation with them for an additional $250. And that could go on forever.”
A handful of states prohibit payday lenders from rolling loans over, but do allow them to make another loan to the same borrower as soon as the first one is repaid. And more than 80% of folks who took out new loans borrowed as much if not more the second time around, racking up thousands of dollars in debt over what started as a few hundred bucks. It’s an alarming figure the Consumer Protection Bureau wants you to be aware of before you decide to take out a loan. Because odds are, if you can’t payback the first, you won’t be able to pay back the second. Or the third. And you may in up in a worse position than you started.