March 25, 2014
WASHINGTON (CBS News / AP) - A report by a federal watchdog has found that about half of all payday loans are made to people who extend the loans so many times they end up paying more in fees than the original amount they borrowed.
The report released Tuesday by the Consumer Financial Protection Bureau also shows that four of five payday loans are extended, or "rolled over," within 14 days. Additional fees are charged when loans are rolled over.
"We are concerned that too many borrowers slide into the debt traps that payday loans can become," said CFPB Director Richard Cordray in a written statement. He said reforms are needed to ensure Americans have access to other "small-dollar loans" that are more consumer-friendly, that would help them get ahead of debts instead of putting them behind.
Payday loans, also known as cash advances or check loans, are short-term loans at high interest rates, usually for $500 or less. They often are made to borrowers with weak credit or low incomes, and the storefront businesses often are located near military bases. The equivalent annual interest rates run to three digits.
The report also found that only 15 percent of borrowers who take out payday loans are able to pay off the loan on time, without taking out another loan within 14 days. The remaining 85 percent either default on the original loan or take out a new one, trapping them in a never-ending cycle of debt.