Hello tsuke,
Thanks for the link.
And it makes my point well:
(from your link) ""This paper seeks to examine another key indicator of unaffordability: payday loan defaults (sometimes called “return events”), which we define as occurring when a borrower’s check or electronic transaction is returned for insufficient funds. "
Summary of Findings
This paper’s findings, listed below, highlight that the lack of underwriting for payday loans creates economic distress for borrowers from the very first loan:
1. Nearly half of all payday borrowers defaulted within two years of their first loan. (Defined above as having the check they wrote to cover the loan bounce.)
2. Of borrowers who defaulted, nearly half did so within the first two payday loans.
3.
Default does not necessarily signal the end of payday borrowing, with many defaulters going on to repay their loan and even borrow (and possibly default) again at a later date. (emphasis mine)
4. Nearly one in five borrowers had a loan charged off by the lender.
5. One-third of payday borrowers experienced at least one invisible default in which their account was overdrawn on the same day that they made a payment to a payday lender.
6. For payday borrowers, overdrafts and bounced transactions frequently occurred close in time to the use of payday loans. nearly half of payday borrowers incurred an overdraft or NSF fee in the two weeks after a payday loan transaction, and 64% paid overdraft or NSF fees at some point.
Figure 3 shows that of all borrowers, nearly one in five (19%) had a loan a charged off. Charge-offs indicate that the borrower has been in default long enough that he or she is unlikely to ever pay it back; borrowers with loans charged off can still face aggressive third-party debt collection tactics.
Finding 3:
Default does not necessarily signal the end of payday borrowing, with many default-ers going on to repay their loan and even borrow (and possibly default) again at a later date. Sixty-six percent of borrowers who defaulted ultimately paid the debt back in full. The remaining one-third of defaulters may have paid it back in part, but the Veritec database does not track partial payments.
This paper finds significant levels of both visible and invisible defaults. on the visible side, we find that a large proportion of borrowers—nearly two in five—defaulted within one year of taking out their first payday loan, and almost half did so within two years. Most defaulters did so early in their borrowing, with nearly half defaulting on the first or second loan. For most borrowers, default did not signal the end of the cycle of debt: two-thirds ultimately paid their debt back in full, and nearly two in five went on to re-borrow at a later date. of defaulters, nearly two in five had a loan charged off.
(invisible defaults are the ones where the check does not bounce because the borrower had overdraft protection at their bank - and they paid additional fees for that feature)
Our findings thus provide evidence that payday loans cause financial harm. As a result, we make the following policy recommendations:
• Congress should enact a 36% APR limit applicable to all borrowers, similar to what it enacted for active-duty military and their families in the Military Lending Act.
• CFPB should promulgate regulations that: require payday lenders to determine the borrower’s ability to repay the loan without re-borrowing, including consideration of income and expenses;o do not provide a safe harbor for loans that are poorly, or not at all, underwritten; do not sanction any series of repeat loans or rollovers; and establish an outer limit on length of indebtedness that is no longer than FDIC’s 2005 guidelines—90 days in a 12-month period.
• Federal regulators—including the department of Justice, FTC, prudential regulators, and CFPB—should use their enforcement authority against payday lenders to address violations of law.
• States should continue to put in place 36% APR limits applicable to payday loans."
• States should vigorously enforce their laws against unlicensed lenders and should work in partnership with federal regulators to address attempts at subterfuge.
• In addition to implementing substantive protections, CFPB and states should continue to collect and make public detailed data on payday loan use."
Most of the 40-50% of defaults are eventually repaid and end up being return customers and even default repeatedly, resulting in more profits for the lenders. Defaults may represent the largest part of the profits for lenders.
Predatory lending is not helping the victims. Some loans should not be made. But for the ones that could be made, the interest rate should not be excessive. Reasonable rates of up to 36% will result in profits for lenders, but the cash-grab which destroys lives is reprehensible and should not be allowed. The modest profits available by making these loans would be an excellent function of the USPS.
