A recent report from the Center for Responsible Lending makes us grateful that Maryland is among the states that has banned payday loans. Unfortunately, as an op-ed piece in the Baltimore Sun pointed out in August, cash-strapped consumers — many of them seniors — can still find short-term loans on the Internet.
The CRL maintains that payday loans create a cycle of debt that borrowers cannot break free of. If you believe the marketing materials, a payday loan is the perfect answer to an unexpected expense, like a medical bill or house repair. The borrower needs a little bump until the next paycheck comes in; then the debt will be paid off.
According to the report, though, most borrowers use the money not to cover an emergency but to cover monthly bills. And that is where the cycle starts.
If a borrower cannot manage average monthly expenses, he or she most likely cannot manage the payday loan payments, either. Another loan follows, with more fees, and then another and another. Of the $3.4 billion in fees collected by payday lenders, $2.6 billion come from “churning,” that is, borrowers renewing a loan immediately or paying a loan off only to borrow again soon after that.
Faced with both bills and loan payments, borrowers tend to up the loan amount with each successive loan. They also borrow more frequently — according to the CRL report, payday borrowers were in debt, on average, for seven months in their first year of borrowing, and that debt extended through the first six months of the second year. Thirty-seven percent of borrowers defaulted during the first year of payday loans; the rate increases to 44 percent for borrowers during their first two years.
Missing a payment or defaulting comes at a price, too. The trap is that borrowers opt to pay the loan rather than other debts just to avoid the fees. In the end, the other accounts are in serious arrears if not in default, and the loan is no closer to being paid off.
If you find yourself in a financial bind like this, or if you are considering a payday loan just to meet your everyday expenses, you may want to consult with a Gaithersburg Maryland Nonprofit Bankruptcy Lawyer. There could be a better option for you.
Source: Collections & Credit Risk, “Consumers Lose $3.4B Yearly in Payday Lending Fees: Study,” Sept. 24, 2013