The repayment option of rolling-over the previous loan into a new loan that lenders offer to their borrowers has resulted in the repeated borrowing of most consumers of payday cash advances. A survey reveals that 38 states in the US permit interest to be charged at triple-digit annual average rates.
Usually, when a borrower plans to take out a payday cash advance, he usually includes in his postdated check the interest fee and the principal amount. The lender will hold the check for about two weeks or until a paycheck or Social Security payment is issued to the borrower. Once the borrower receives his paycheck, the lender deposits the check as repayment of the loan. This is the way payday cash advances should work.
However, a report from the Center for Responsible Lending reveals that 90% of borrowers of these small, short-term and high-cost payday cash advances, practiced repeated borrowing. In fact in the state of Virginia, it was found that 85% of payday cash advance borrowers returned to the same store in the same year for about a dozen times.
According to Jay Speer, the executive director of the Virginia Poverty Law Center, this is a strategy of payday lenders. He said, “They set it up so you have to pay the whole thing off in two weeks and they know you can’t. It’s bad enough that the interest rates are 380% APR, but the worst part is that they trap you.”
Originally, payday cash advances were designed to meet an emergency need only, that’s why they have shorter terms, usually two weeks. However, many borrowers have used repeated borrowing because they are unable to pay within the allotted time. From this point of view, borrowers are the ones to be blamed for getting trapped into the cycle of debt.
According to Jamie Fulmer, investor relations director for Advance America, Cash Advance Centers Inc., “If you look at our target customers, they are middle-class working Americans who for whatever reason get caught between paychecks without alternatives.”
The payday cash advance industry has profited for the past years. Last year alone, the industry generated about $6 billion in fee revenues and $40 billion in loan volume at 23,000 stores. An estimated 24% increase was seen on their net profit from the previous year. About 70% of this profit is estimated to be coming from fees and income of repeated borrowing.
The growth of repeated borrowing among consumers of payday cash advances is quite alarming. A report shows that consumers receiving between 2 to12 loans last year rose to 23%, and those receiving more than a dozen loans rose to 19%. Why such an increase in repeated borrowing? This may be the question that only borrowers of payday cash advances can answer. Consumer advocates say that lenders attract customers because, unlike banks and credit unions, payday loans have fast approval rates, ask only a few questions and you don’t need good credit scores. As a result, many people patronize these financial products and have been repeated customers.
The government and consumer protection groups have been working extensively to prevent borrowers of payday cash advances from being trapped in debt. However, these borrowers also need to be educated to make informed and wise decisions. This will be the key to save them from drowning in the well of debt.