Payday lenders provide small loans that are repaid in one lump sum, usually on the borrower’s next payday. Although these loans can offer quick funding without a credit check, they often trap consumers in a cycle of debt due to the short repayment term and high annual percentage rate (APR).
Of the 26 states that allow payday loans, 16 of them require lenders to offer free extended payment plans to deter reborrowing. But even in states that have implemented these consumer protections, payday loan borrowers continue to pay high rollover fees, according to a new report the Consumer Financial Protection Bureau (CFPB).
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“Our research suggests that state laws that require payday lenders to offer extended repayment plans at no cost are not working as intended,” CFPB Director Rohit Chopra said. “Payday lenders have a strong incentive to protect their income by encouraging borrowers to re-borrow in expensive ways.”
Keep reading to learn more about the recent CFPB study, as well as how you can break the cycle of payday loan debt. One option to consider is consolidating payday loans into a fixed rate personal loan. You can visit Credible to compare debt consolidation loans for free without affecting your credit score.
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Extended payment plans can save borrowers money, but many don’t use them
If a borrower can’t repay their payday loan, they have a few options: roll over their loan for another two weeks, default on their loan, or sign up for an extended payment plan — at least in the 16 states that have it. require.
On a typical $300 payday loan, borrowers can realize substantial savings by using a payment extension rather than rolling over the loan. The CFPB estimates that a borrower will incur $360 in rollover fees over the course of four months, compared to a one-time fee of $45 for an extended payment plan.
Despite the obvious benefits, extended repayment plan utilization rates in states that offer this option are still far lower than payday loan rollover rates. In other words, payday loan borrowers were much more likely to roll over their loans rather than use an extended repayment plan.
For example, the churn rate was 16.4% in Wisconsin last year, compared to the extended payment plan utilization rate of just 2%. And just 0.4% of Florida payday borrowers use payment plan extensions, while more than a quarter (26%) have 10 or more loans.
If you’re having trouble repaying multiple payday loans, you might consider consolidating them into one personal loan. Unlike payday loans, personal loans offer fixed interest rates and longer, more predictable repayment terms. You can read more about payday loan consolidation on Credible.
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Eligibility Criteria May Contribute to Low Extended Payment Plan Utilization Rates
One of the reasons for the low use of extended repayment plans is “substantial variation in eligibility requirements” that payday loan borrowers must meet under state regulations, the CFPB found.
Alaska law requires borrowers to repay at least 5% of the outstanding loan balance before being eligible for a payment plan extension. Utah allows lenders to charge a 20% upfront payment if a borrower enters an extended payment plan after default.
In Florida, borrowers must enroll in credit counseling services to be eligible for an extended grace period. This can be a potential and time-consuming hurdle for borrowers who feel the urgency of missing a loan repayment.
Only seven of the 16 states that require extended repayment plans require lenders to inform borrowers of this repayment option before taking out a loan. And in most states, borrowers can only use one extended repayment plan over a 12-month period.
As an alternative to payday loan rollovers and extended repayment plans, some borrowers might consider paying off their debt with a fixed rate personal loan. Debt consolidation can help you spread the repayment of your debts over a longer period. You can compare current rates in the chart below and use Credible’s personal loan calculator to estimate your monthly payment.
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