Payday loans are marketed as one time ‘quick fix’ consumer loans for people facing a cash crunch. In reality these loans create a long-term cycle of debt, and a host of other economic consequences for borrowers. Studies have shown that payday borrowers are more likely to have credit card delinquency, unpaid medical bills, overdraft fees leading to closed bank accounts, and even bankruptcy.

Here’s How the Debt Trap Works

  1. In order to take out a loan, the payday lender requires the borrower write a check dated for their next payday.
  2. The payday lender cashes the check on that payday, before the borrower can buy groceries or pay bills.
  3. The interest rates are so high (over 300% on average) that people cannot pay off their loans while covering normal living expenses.
  4. The typical borrower is compelled to take out one loan after another, incurring new fees each time out. This is the debt trap.

The average borrower takes out 10 loans and pays 391% in interest and fees. 75% of the payday industry’s revenues are generated by these repeat borrowers. 

Car title and installment loans are variations on the same theme. Car title lenders use a borrower’s vehicle as collateral for their unaffordable loans. Installment loans typically have longer payoff periods and replace slightly lower interest rates with expensive, unnecessary ad-on products.