400% Interest Payday Loans Lead Borrowers into Long-Term Debt Trap

DURHAM, NC – The Center for Responsible Lending (CRL) today released the first episode of its “In Focus” video series, designed to break down complex financial issues and make them easier to understand. In the series, CRL financial experts will help people recognize and prevent financial exploitation, to promote financial fairness for all Americans.

In the APR Matters video, CRL senior policy counsel Yasmin Farahi explains why predatory payday lenders downplay the APR (annual percentage rate of interest) for high-cost loans that can carry 400% annual interest rates.

“We constantly hear payday lenders say APR doesn’t matter for their loans, because they are a short-term product,” said Farahi. “APR matters very much for payday loans because it allows for an apples-to-apples comparison with other credit options. For example, the cost of a typical 30-day credit card advance may be $4.50, compared to $90 for a two-week payday loan renewed for a second two-week period. Lenders often hide the excessive rates and fees of these loans in the fine print.”

“In addition, these loans are targeted to low-wage workers and are designed to be flipped into new loans one payday after another, so that 400% interest adds up very quickly,” continued Farahi. “As the borrower’s bank account is drained each payday, it becomes harder and harder to escape the debt trap.”

The CFPB found that 75% of payday loan fees come from borrowers with ten or more loans per year, indicating that payday lenders rely on these long-term traps for their businesses to function. Payday loans are associated with a cascade of financial harms, including involuntary bank account closure and bankruptcy.

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Press Contact: Carol Parish carol.parish@responsiblelending.org