DURHAM, NC – Payday and car title lenders continue to operate in states with weak consumer protections, extracting nearly $3 billion in fees each year from low-wealth communities, according to a report released today by the Center for Responsible Lending (CRL).  

“The Debt Trap Drives the Fee Drain: Payday and Car-Title Lenders Drain Nearly $3 Billion in Fees Every Year” breaks down by state the dollar amount of fees generated through these practices, finding that in total $2.2 billion are extracted through triple-digit interest single-payment and payday installment loans from borrowers with average annual incomes of approximately $25,000. Another $700 million is extracted through triple-digit interest car title loans that often end in borrowers losing their vehicle to repossession. 

The loans carry annual interest rates averaging more than 300% and have high rates of repeat borrowing. The CFPB found that 75% of payday lender fees are generated from borrowers with more than ten loans per year, demonstrating that these lenders rely on a business model of churning loans to borrowers who cannot afford to pay them off without reborrowing. 

“The scale of this wealth extraction is troubling, with much of the $3 billion flowing through storefronts positioned in low-wealth communities. They are set up to systematically draw borrowers into the long-term cycle that underpins the predatory lending business model. But even this calculation is conservative as longer-term payday lending and online lending are burgeoning and much of that activity is not reported to state regulators,” said Charla Rios, deputy director of research for CRL. “Policymakers should cap annual interest rates at no more than 36% to stop the extraction of wealth from communities and consumers already struggling with financial instability. They should also pass laws to prevent predatory lenders from evading state consumer protections.” 

Payday and car-title loans are associated with a cascade of adverse financial consequences, such as difficulty covering living expenses, more frequent overdraft fees, delinquency on other bills, involuntary loss of bank accounts, wage garnishment, and even bankruptcy. In the case of car-title loans, for which the borrower signs over their vehicle as security for the loan, the result is often the repossession of their car—with one in five car-title loan sequences ending in vehicle repossession. Borrowers who don’t lose their vehicle often pay exorbitant fees repeatedly to avoid the loss of their means of transportation.  

In an ongoing trend, several states have recently joined those states that ban triple-digit interest rate lending by capping allowable interest rates. State lawmakers have passed caps in Illinois, New Mexico, and Minnesota (to take effect January 2024). And by wide margins, voters have passed 36% rate caps by ballot measure in recent years, including in Nebraska, Colorado and South Dakota. 

Resource: A CRL video released today features Deputy Director of Research Charla Rios breaking down the 36% cap on annual interest rates and its impact on predatory lending.  

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Media contact: Carol Parish carol.parish@responsiblelending.org