Some pay more than double for payday loans
Each year, more than 12 million borrowers take out payday loans in more than 20 states that allow this type of lending and have no interest rate caps.
The interest rate on these loans can be almost 400%.
In more than a dozen of these states, free amortization schedules are an option for paying off these loans. This means that you can only repay the principal and fees that you have already been charged. You would split this balance over several months.
But according to recent research from the Consumer Financial Protection Bureau, those plans aren’t working as intended.
“It’s not surprising that these particular laws don’t work,” said Charla Rios, a researcher at the Center for Responsible Lending, “because we know of the well-documented research and downsides behind payday loans in general. So it’s not surprising that the product still keeps people in a debt trap as intended.”
The savings from a free amortization schedule can be significant.
Research from CFBP shows that on a typical $300 loan, you would pay $45 in rollover fees every two weeks until the principal and fees are paid off. That means that after four months you paid $360 and you still owe the original $300.
If you have a payback plan after the initial rollover, you’ll only pay $345 for a longer period of time.
The trade group that represents the payday loan company says they work to ensure every customer has a positive experience with their products, that people are not only informed about their options like advanced payment plans, but actually take advantage of them.
TThe Center for Responsible Lending is pushing for a general interest rate cap of 36% on payday loans.