Debt cycle detailed in payday-advance sector

The prepaid card industry now has more evidence to make the case that prepaid card products are a better financial services alternative than payday loans. The evidence comes from testimony delivered to the U.S. Senate's Special Committee on Aging that payday loan borrowers often get trapped in cycles of debt that are difficult to overcome.

The July 24, 2013, testimony by David M. Silberman, Associate Director for Research, Markets, and Regulation at the Consumer Financial Protection Bureau, was based on research the CFPB conducted into how consumers use small-dollar payday loans.

Silberman said that, over a 12 month period, 48 percent of payday borrowers took out 11 or more loans and 52 percent of deposit advance borrowers obtained advances totaling $3,000 or more per borrower.

Additionally, 14 percent of payday borrowers took out 20 or more loans in that 12-month period, with the same percentage of deposit advance borrowers receiving over $9,000 per borrower. Routinely, the heavier borrowers get advances on paychecks without having first repaid the previous loans, Silberman said.

The CFPB found that lenders typically charge a fixed fee of $15 per $100 for a payday loan and $10 per $100 for a deposit advance. Repayment of the loans are timed to borrowers' next regular receipt of cash, most often a paycheck, but may also be from unemployment insurance, social security benefits or, in the case of deposit advances, other electronic deposit, Silberman said.

The director noted that the CFPB's research underscored a correlation between the use of deposit advances and the occurrence of overdrafts and nonsufficient fund (NSF) fees. The bureau found that 65 percent of deposit advance borrowers incurred at least one overdraft or NSF fee during the 12-month research period, and that the number of overdraft or NSF fees increased as the amount of advances increased. "Light users" of these products incurred an average of seven penalties, while "heavy users" averaged 16, Silberman noted.

The CFPB's findings highlight the difficulty faced by users of payday and deposit advance products when they ring up debt over time and struggle to repay the money. Silberman said, "[I]t appears to be hard for many consumers to repay the loan and meet other expenses without experiencing another short-fall, taking out another expensive loan, and/or overdrawing an account. Financial products that trigger a cycle of debt can exacerbate the precarious balance of consumers' financial lives."

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