Protections on Payday Loans Fall Short, Watchdog Says

Lenders are steering borrowers into costlier repayment options, report finds

Exterior view of a Payday Loan Store in downtown Chicago, Illinois, 2019.

Interim Archives / Contributor / Getty Images

Even when payday loan borrowers have the option of saving money with a no-cost extended payment plan, most are choosing instead to continue paying with an expensive “rollover” loan, a new report from the government’s consumer finance watchdog says.

Key Takeaways

  • State laws requiring payday lenders to offer no-cost extended payment plans aren’t working as intended, according to a new report from the Consumer Finance Protection Bureau.
  • Instead of choosing the no-cost option, most borrowers are opting to roll over their loans and incurring hefty “rollover” fees in the process, the bureau says. 
  • While the bureau contends that payday lenders are motivated to protect their revenue with “costly re-borrowing,” an industry representative says customers are offered plans with longer repayment periods at no additional charge.

The report shows that state programs requiring payday lenders to offer the extended payment plans aren’t working as intended, according to the Consumer Financial Protection Bureau. Of the 26 states that permit payday loans—typically, loans of $350 or less that have to be paid back with a single payment on the borrower’s next payday—16 of them have laws requiring payday lenders to offer no-cost extended payment plans that let borrowers repay their loans in installments at low rates, the report said. 

But borrowers aren’t taking advantage of these plans, and some payday lenders have withheld information about the programs or otherwise deceived borrowers about their options, the bureau said. Meantime, payday lenders instead are encouraging borrowers to sign up for pricey loan-extension programs—also known as “rolling over” the loan—that can rack up fees without cutting into the loan’s principal, the report said. 

The fees alone for a borrower to roll over or extend a simple payday loan of $300 can quickly mount up, growing as high as $360—substantially exceeding the original loan amount—in just four months. By entering into a no-cost extended payment plan, by contrast, the same borrower would only have to pay a total of $345 over the extended period. 

“Payday lenders have a powerful incentive to protect their revenue by steering borrowers into costly re-borrowing,” Rohit Chopra, the bureau’s director, said in a statement. 

Options Are Disclosed, Lenders Say

The trade association representing payday lending said that all of its member-companies provide extended payment plans, or EPPs, unless they’re specifically prohibited by state law. 

“EPP options are fully disclosed and explained to customers, both in contracts and in-person at community-based locations across the country and in accordance with state law,” Ed D’Alessio, executive director of INFiN, a Financial Services Alliance, said in a statement. “The EPP allows customers a longer repayment period at no additional charge, and without compounding interest or other fees.” 

The Pew Charitable Trusts this week released its own analysis of payday lending, finding that there is little competition among payday lending stores, which often charge the maximum allowed by state law.

“This report from the CFPB shows that even though payday lenders have claimed that they are offering these extended payment plans, in reality, that does not happen very often,” said Alex Horowitz, a principal officer at the trusts.

Horowitz said that since payday borrowers often need to borrow again, lenders will often discourage borrowers by preventing them from taking future loans if they enter into an extended payment program. 

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  1.  CFPB. “CFPB Finds Payday Borrowers Continue to Pay Significant Rollover Fees Despite State-Level Protections and Payment Plans.”

  2. INFiN. “Statement on the CFPB’s Small-Dollar Lending Report.”

  3. Pew Charitable Trust. “Payday Loans Cost 4 Times More in States With Few Consumer Protections | The Pew Charitable Trusts.”

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