The Consumer Financial Protection Bureau (CFPB) on Wednesday (April 6) reported that most payday loan borrowers haven’t benefitted from extended payment plans, which lenders must offer to borrowers in a majority of states where payday lending is prohibited, and are instead paying more rollover fees.
“Our research suggests that state laws that require payday lenders to offer no-cost extended repayment plans are not working as intended,” said CFPB Director Rohit Chopra in the bureau press release. “Payday lenders have a powerful incentive to protect their revenue by steering borrowers into costly re-borrowing.”
More than 12 million borrowers take out payday loans every year in the 26 states where payday lending is not prohibited, and 16 of those states require payday lenders to offer no-cost extended payment plans.
Payment plans allows a borrower to repay the principal and fees already incurred, splitting the remaining balance over several months. If they do not repay their loan, buyers can roll over their loan, which renews the borrower’s loan for another pay period and the borrower is charged a fee.
On a $300 loan, a borrower would pay $45 in rollover fees every two weeks until they can pay off the principal and incurred fees, meaning the borrower would have paid $360 in rollover fees after four months and still owe the original $300.
If the same borrower opted for a no-cost extended payment plan at the time of the first rollover, they would only have to pay $345 over an extended period. Most payday loans were made to borrowers who use the rollover option so many times that the accrued fees were greater than the original principal, according to previous bureau research.
Related: 21 Attorneys General Urged CFPB to Regulate BNPL
In March, the CFPB closed its request for comments regarding the inquiry on buy now, pay later (BNPL) that it launched in December. Most of the 44 public comments available on the bureau’s website urged the CFPB to increase transparency and information disclosure requirements from BNPL firms.
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