Consumers lose $8B in fees each year with payday and car-title loans

New research from the Center for Responsible Lending finds that every year, $8 billion in fees is lost to one of two types of small-dollar, predatory lending: payday and car-title loans. Usually sold to consumers with average incomes of approximately $25,000, these loans may have different names; but both charge triple-digit interest rates that generate the bulk of their debt trap fees. These fees leave most borrowers renewing rather than retiring the loans.

The new report is the first update since 2013 that tracks fees charged state-by-state to these two predatory products. These billion-dollar fee costs do not take into account additional charges such as late fees, bounced payments or other penalties imposed by the lenders. Charges for these types of fees would be additional.

“Payday loans and car-title loans are marketed as an infusion of cash to financially struggling people,” states the report. “In reality, these loans typically drain hundreds of dollars from a person’s bank account in amounts well above the original loan amount. . . This fee drain hampers future asset-building and economic opportunity in communities most impacted by these predatory lending practices.”

According to the report, payday loans drain $4.1 billion in annual fees from consumers living in one of 36 states where the loans are legal. The Consumer Financial Protection Bureau (CFPB) found that 75 percent of all payday loan fees are generated from borrowers with more than 10 loans a year. On a typical $350, two-week loan, borrowers will pay $458 in fees.

Similarly, car title loans offered in 23 states account for represent another $3.9 billion in fees each year. For these borrowers, car repossession, not repayment, is a common result that ends mobility for working families. Depending upon available alternative transportation options that can jeopardize employment.

Nearly half of these combined fees — $3.95 billion — come from only five states: California, Illinois, Mississippi, Ohio and Texas. Each of these states loses a half-billion or more in fees each year.

This article originally published in the May 23, 2016 print edition of The Louisiana Weekly newspaper.