Payday lenders offer small loans that are repaid in a single lump sum, usually on the borrower’s next payday. While these loans can provide quick financing without a credit check, they often trap consumers in a cycle of debt due to the short repayment period and high annual percentage rate (APR).
Of the 26 states that allow payday loans, 16 require lenders to offer free advanced payment plans to discourage re-borrowing. But even in the states that have instituted these consumer protections, payday loan borrowers continue to pay hefty rollover fees a new report by the Consumer Financial Protection Bureau (CFPB).
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“Our research suggests that state laws that require payday lenders to offer free extended repayment plans are not working as intended,” CFPB Director Rohit Chopra said. “Payday lenders have a strong incentive to protect their earnings by directing borrowers to expensive new loans.”
Read on to learn more about the CFPB’s recent study and how you can break the cycle of payday loan debt. One option to consider is consolidating payday loans into a fixed rate personal loan. You can visit Credible to compare debt consolidation loans for free without hurting your credit score.
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Advanced payment plans can save borrowers money, but many don’t use them
When a borrower can’t repay their payday loan, they have a few options: extend their loan for another two weeks, default their loan, or sign up for an extended payment plan — at least in the 16 states that require it.
On a typical $300 payday loan, borrowers can make significant savings by using a payment extension rather than extending the loan. The CFPB estimates that a borrower would incur $360 in rollover fees over the course of four months, compared to a $45 one-time fee for an extended payment plan.
Despite the obvious benefits, utilization rates for extended repayment plans in the states that offer this option are still much lower than payday loan rollover rates. In other words, payday loan borrowers were much more likely to extend their loans than to take advantage of an extended repayment plan.
For example, the rollover rate last year in Wisconsin was 16.4%, compared to the enhanced payment plan usage rate of just 2%. And just 0.4% of Florida payday borrowers use payment plan extensions, while more than a quarter (26%) have 10 or more loans.
If you are struggling to pay off multiple payday loans, consider combining them into a single personal loan. Unlike payday loans, personal loans offer fixed interest rates and longer, more predictable repayment terms. Learn more about payday loan consolidation on Credible.
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Eligibility criteria can contribute to low usage rates for advanced payment plans
One reason for the low utilization of extended repayment plans is “a significant variation in the eligibility requirements” that state regulations require payday loan borrowers to meet, the CFPB noted.
Alaska law requires borrowers to repay at least 5% of the outstanding loan balance before they can qualify for a payment plan extension. Utah allows lenders to charge an initial payment of 20% when a borrower enters into an extended payment plan after defaulting.
In Florida, borrowers must register with credit counseling services to be eligible for an extended grace period. This can present a potential time-wasting hurdle for borrowers who feel the urgency of missing a loan payment.
Only seven of the 16 states that require enhanced payment schedules require lenders to make borrowers aware of this repayment option before borrowing. And in most states, borrowers can only take advantage of an extended repayment plan within 12 months.
As an alternative to payday loan extensions and expanded payment plans, some borrowers might consider paying down their debt with a fixed-rate personal loan. Debt consolidation can help you spread your debt payments over a longer period of time. You can compare current interest rates in the table below and use Credible’s personal loan calculator to estimate your monthly payment.
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