Consumer Lending

“Cooling off” periods for payday loans have minimal impact on renewals

cfpbA report released by the CFPB on Tuesday showed that “cooling off” periods aimed at discouraging borrowers from taking out multiple payday loans in the same day have had little impact on rollovers and renewals.

According to the report, which is based on data from more than 12 million payday loans over a one-year period, over 80 percent of payday loans are rolled over or renewed within two weeks.

Last year, regulators proposed the cooling-off periods that prevent borrowers from taking out more than one deposit advance loan during a monthly pay cycle. The report, however, showed the restrictions have had little effect on renewal rates, which are nearly identical to states without the rules.

The report also showed borrowers who take out several consecutive payday loans are likely to pay more in fee expenses than they borrowed. For approximately 25 percent of all new payday loans, borrowers end up renewing the loan six times or more—the average payday loan fee of 15 percent means some consumers have paid more in fees than the original loan amount.

The CFPB report showed 80 percent of payday loan borrowers either default or renew their loan within a year—only 15 percent of borrowers repay all of their debts without re-borrowing within 14 days, 20 percent default on the loan and another 64 percent renew at least one loan one or more times.

Regulators have warned that payday loans, if used frequently, can put consumers into a debt trap where they cannot pay back what they owe. According to the report, more than 80 percent of borrowers who extended loans owed as much or more on the last loan than they amount they originally borrowed, making it difficult to get ahead of the debt.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” CFPB Director Richard Cordray said. “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 CFPB began supervision of the payday loan market in January 2012. Last November, the agency began accepting complaints related to payday loans on its consumer complaint database.

Comments are closed.