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By Jacob Davidson
April 1, 2015

We already know a lot about the terrible impact payday loans have on borrowers.

For instance, the median payday borrower is in debt for 199 days out of the year, even though most loans are due after just two weeks. We also know the reason customers are in debt so long is because they can’t afford to pay off the loans in time, and are forced to take out new loans over and over again, with four out of five payday loans being rolled over or renewed within 14 days.

We even know that this cycle of debt means the typical payday user is on the hook for $458 in fees over the life of their loan—130% of the median loan size—and that more than half of payday loans are made to people who end up paying more in fees than they originally borrowed.

Now, a recent study from the Center for Responsible Lending, a non-profit focused on promoting fair lending practices, discovered nearly half of all payday loan customers defaulted within two years of their first loan. The study also found almost 50% of defaulters did so within their first two payday loans.

In order to collect this data, researchers tracked 1,065 people who took out their first payday loan in the last three months of 2011 for two years. Four out of ten of those borrowers defaulted in the first year, while 46% defaulted within two. One-third of those who were unable to pay their debt also experienced a subsequent default.

Payday defaults are particularly hard on borrowers because they tend to result in additional fees. Payday lenders generally ensure they are “first in line” to be paid by obtaining a post-dated check from customers or securing electronic access to the borrower’s bank account and initiating a transaction themselves when a loan is due. If the borrower does not have sufficient funds in their account when this transactions occurs, the CRL notes, they will have to pay a “non-sufficient funds” fee to the bank and to the lender.

Depending on the bank, the borrower may instead be charged an overdraft fee of about $35. The study refers to this as an “invisible” default because while the lender is technically paid on time, the account holder still has insufficient funds and faces additional costs. Using a year-long sample of transaction records, researchers found one in three borrowers made a payday loan payment on the same day they incurred an overdraft fee, suggesting an invisible default.

The study’s authors emphasize that defaults do not necessarily free borrowers from their debt. On the contrary, researchers found, two-thirds of defaulters eventually paid their loan balance back in full. About 40% of defaulters had a loan “charged off,” meaning it was 60 days overdue and generally written off as a loss for the lender. Researchers note those borrowers “can still face aggressive third-party debt collection tactics.”

The study concludes by strongly advocating a number of protections for payday users, including a 36% interest rate cap and a requirement that lenders look at borrowers’ income and expenses to determine they can repay their loan balance without re-borrowing. Last week, the federal Consumer Financial Protection Bureau outlined multiple proposals for regulating payday loans, including an “ability to repay” standard.

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