What’s the biggest problem with payday loans?
The obvious answer would seem to be “high interest rates.” But interest rates are often tied to credit risk, and so charging high interest rates is not always wrong. Another answer may be that the loans appear to be targeted toward minorities. But research shows that the industry appeals to those with financial problems regardless of race or ethnicity.
No, the problem with payday loans — what makes them a debt trap — is “rollovers.”
A study by the Consumer Financial Protection Bureau (CFPB), the U.S. government’s consumer protection agency, found that four out of five payday loans are rolled over or renewed within 14 days. 40 percent of borrowers take out only one loan, about 15 percent take out two loans in sequence, and 45 percent take out three or more. But 14 percent of borrowers take out more than 11 loans in a row.
The CFPB is considering proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans.
All lenders making covered short-term loans would be required to adhere to one of two sets of requirements. The first set would “prevention requirements” which the CFPB says: