NEW YORK (MainStreet) Imagine trying to pay off a short-term loan with an interest rate of nearly 400%. That's the debt treadmill many borrowers face with payday loans, according to the Federal Trade Commission (FTC). And while proponents say these "cash advances" help families with few financial resources meet unexpected expenses, a 2012 Pew Research study reported that only 16% of payday loan customers borrowed money to pay for an emergency need. Instead, more than two thirds (69%) used the funds to meet a recurring expense, such as paying the rent or buying groceries.
It's a money pit deep and dangerous: the majority of payday borrowers renew their loans so many times they end up paying more in fees than the original amount of money they borrowed. The Consumer Financial Protection Bureau (CFPB) says four out of five payday loans are renewed within 14 days.
"We are concerned that too many borrowers slide into the debt traps that payday loans can become," said CFPB Director Richard Cordray. "As we work to bring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind."
The study found that four out of five payday borrowers either default or renew a payday loan over the course of a year. Only 15% of borrowers repay their loan when due without re-borrowing again within 14 days. Fully 20% default on a loan at some point -- 64% renew at least one loan one or more times.