Every year, more than 12 million borrowers take out payday loans in more than 20 states where this type of lending is allowed and interest rate caps are not in place.
The interest rate on these loans can be nearly 400%.
No-cost extended-repayment plans are an option for paying off these loans in more than a dozen of those states. That means you could repay only the principal and fees that you were already charged. You would split that balance over several months.
But according to recent research from the Consumer Financial Protection Bureau, these plans are not working as intended.
“It's not surprising that these particular laws aren't working,” said Charla Rios, a researcher at the Center for Responsible Lending, “because we do know the well-documented research and harms behind payday lending in general. So it's not surprising that the product is still keeping people in a debt trap as designed."
The savings from a no-cost extended-repayment plan can be substantial.
Research from CFBP shows on a typical $300 loan, you would pay $45 in rollover fees every two weeks until the principal and fees are paid off. That means after four months, you would have paid $360 and still owe the original $300.
If you entered into a repayment plan after the first rollover, you'd only end up paying $345 over an extended period.
The trade group that represents the payday loan company says they work to ensure every customer has a positive experience with their products, that the people are not only informed of their options, like extended payment plans but take advantage of them as well.
The Center for Responsible Lending is pushing for a 36% interest rate cap across the board on payday loans.