NEW YORK (MainStreet) — Cash-strapped workers may think taking out a payday loan to cover expenses until the next paycheck is a minor risk, but a new study suggests that these borrowers aren’t incurring just a short-term debt.
According to consumer watchdog group the Center for Responsible Lending, payday borrowers actually remain in debt, on average, for more than half a year, despite the fact that a payday loan typically must be repaid within two weeks.
As MainStreet has previously reported, a consumer in need of fast funds gets a payday loan by giving the lender a post-dated check in exchange for some cold, hard cash. But the advance typically has an astronomical annual percentage rate (sometimes around 400%) or other high fees associated with it.
As such, when the lender takes the full amount of the loan from the borrower’s next paycheck, little is left for borrowers to manage daily living expenses and, invariably leads to another payday loan. According to the data, the typical $300 for an initial payday loan increases to $466 by the time it is to be paid back.
Researchers at the CRL tracked transactions for 11,000 borrowers in Oklahoma over the course of two years, focusing on borrowers who took out their first payday loans in March, June or September of 2006.
Oklahoma was selected because it’s one of the few states where a loan database makes this kind of analysis possible. CRL then compared these findings with available information from regulator data and borrower interviews in other states.
It found that in the first year after taking out a loan, the average borrower was in debt for 212 days. Over the full two-year study, the average length of borrower indebtedness grew to 372 days.