A report released today by the Consumer Financial Protection Bureau (CFPB) shows that few payday loan borrowers are benefiting from no-fee extended payment plans, which must be offered to borrowers in the majority of states that do not prohibit payday loans. Instead of using payment plans, borrowers continue to pay for expensive loan rollovers. While fee-free extended payment plans are intended to help borrowers break out of the cycle of rollovers and fees, the payday business model continues to depend on high rollover rates and fees.
“Our research suggests that state laws that require payday lenders to offer extended repayment plans at no cost are not working as intended,” CFPB Director Rohit Chopra said. “Payday lenders have a strong incentive to protect their income by inducing borrowers to re-borrow in expensive ways.”
Each year, more than 12 million borrowers take out payday loans in the 26 states where payday lending is not prohibited. Sixteen of those states require payday lenders to offer extended payment plans at no cost. A payment plan allows a borrower to repay only the principal and fees already incurred, spreading the remaining balance over several months. The other more expensive option for a borrower, if he does not repay his loan, is to renew his loan. Essentially, a rollover renews the borrower’s loan for another pay period and the borrower must pay an additional payday loan fee.
The savings from an extended no-fee payment plan can be substantial. For example, on a typical $300 loan, a borrower would pay $45 in rollover fees every two weeks until they can repay the principal and incurred fees. After four months, the borrower would have paid $360 in rollover fees and still owe the original $300. If the same borrower opted for an extended payment plan with no fees at the time of the first rollover, they would only have to pay $345 over an extended period. found that most payday loans were issued to borrowers who used the rollover option so many times that accrued fees exceeded the original capital.
Rollover fees are a strong incentive for lenders to keep borrowers on the fence about fee-free extended payment plans. industry has found that some payday lenders have misled distressed borrowers by misrepresenting or withholding information about their payment options.
Today’s report revealed substantial differences between the 16 states that require lenders to offer no-fee payment options:
- State fee-free extended payment plans vary widely. Typical features include disclosure of the right to choose an extended payment plan at the time borrowers enter into a payday loan agreement, the requirement that an extended payment plan be repaid in installments, and no additional fees be billed for an extended payment plan. .
- Utilization rates for no-fee extended payment plans are low in all states. Even in Washington State, which has perhaps the most borrower-friendly extended payment plan, the utilization rate is a small fraction of all payday borrowers, 13.4%. States, like Florida, with more restrictive requirements have even lower usage rates.
- The pandemic has affected payday loan volumes, but not usage of fee-free extended payment plans. Nationally, payday loan volume was down 65% from 2019 in 2020, while payment plan utilization rates remained unchanged. However, there were variations within states. California, for example, saw enrollment in the payment plan more than double.
The CFPB will continue to monitor the payday lending industry and will use its enforcement and supervisory authorities when it finds abuses and violations.
Visit the CFPB webpage, What can I do if I can’t repay my payday loan?to learn more about extended payment plans.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces federal consumer finance law and ensures that markets for consumer financial products are fair, transparent and competitive. For more information, visit consumerfinance.gov.