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"Even when people feel like they're making progress, they're not actually paying down their loans," says Yasmin Farahi, deputy director of state policy and senior policy counsel at the Center for Responsible Lending in Durham, North Carolina. "That's how the cycle continues. They're paying some amount, but it's not enough to get them out from under this."
Clark and Farahi emphasize that borrowers shouldn't feel ashamed for being stuck in a payday loan debt cycle. Though consumer finance education can help, they say greater regulatory efforts are needed to address the issue truly.
"It's important for consumers to understand that this is really a policy problem," Farahi says. "It's up to policymakers to ensure that we're getting rid of these kinds of loan sharks, not up to consumers to learn how to swim with the sharks."
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A debt cycle is when repeat borrowing leads to an ever-increasing debt that may demand even more borrowing to manage it.
According to 2014 research from the CFPB, four out of every five payday loans are reborrowed after the initial two-week term. The CFPB's research also shows that most borrowers end up owing more in fees than the original loan amount.
That was the case with Shannon. Though her initial loan was $140, she eventually paid $500 in fees while making little progress in paying down her principal loan amount.
The quick turnaround time on payday loans is part of why they're so hard to repay, says Clark. Chances are, if you're short on cash when you borrow, you'll still be short on cash two weeks later when you have to repay the loan in one lump sum plus the interest you owe.
If borrowers can't repay, they may be able to renew the loan depending on their state. However, renewals require an additional fee, making it that much harder to catch up when the loan comes due again. -
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Payday loans are short-term, small-dollar loans typically capped at $500. They're considered high-interest because of their fee structure.
A typical two-week $100 payday loan comes with $15 in fees — which equates to an annual percentage rate of 391% — according to the Consumer Financial Protection Bureau. For context, financial experts consider 36% the maximum APR a loan can have to be affordable.
Because payday loans are relatively easy to get, they can also feel like a surefire solution to an urgent financial problem, says Anne Leland Clark, executive director of Exodus Lending, a nonprofit based in St. Paul, Minnesota, that helps families break out of predatory loan debt. But when people can't repay, their financial situation becomes more precarious.
"Payday loans may provide immediate relief in a financial crisis or a financial trauma, but then it almost retraumatizes you," Clark says. "It causes more stress, and people fall into a cycle where they aren't able to catch up."
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