Study finds high default rates in payday loans

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Studying payday loans in North Dakota, the Center for Responsible Lending found that nearly half of all borrowers default on a loan within their first two years of borrowing.

The number – 46% – is attributed to borrowers who took out multiple payday loans during that two-year period or renewed just one loan.

CRLs study, published Tuesday, goes on to say that of the 46 percent, half defaulted on the first two payday loans they borrowed. That, said Susanna Montezemolo, senior policy researcher, means borrowers are in trouble immediately.

The report comes about a week after the Consumer Financial Protection Bureau published its framework for Payday Loan Regulation, which proposed allowing lenders to choose between two different sets of rules. One would prevent the borrower from getting stuck in a debt trap by forcing lenders to determine a borrower’s repayment capacity before issuing a loan. The other would protect lenders after taking out a payday loan from being trapped in fees and unable to repay the loan in the event of default.

Montezemolo said the CRL study supported arguments that the ability to repay standard loans should be required for every payday loan.

“This report shows a high default rate on payday loans even though lenders are the first to be paid – a clear sign that a borrower is unable to escape the debt trap once attracted to a first loan. salary, ”she said.

The CRL used data from North Dakota because it has a database that tracks every borrower in the state.

“We have no reason to think that North Dakota is any different from any other state that doesn’t regulate payday lenders,” Montezemolo said.

Not only are payment checks bouncing, which is known as a visible default, but the CRL has said there are invisible ways borrowers can default on a payday loan. They occur when the check written to the payday lender is accepted, but results in overdraft fees or insufficient funds. The CRL said invisible defaults, which a third of all borrowers face, mask the true default rate and make triple-digit interest rate loans even more expensive for consumers.

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