Report: Payday and Car Title Loans Drain $3 Billion a Year from Low-Wealth Communities

Triple-digit interest rates and car repossessions result in financial pain for borrowers

The Center for Responsible Lending (CRL) released a report analyzing the impact of payday and car title lenders on communities. The research suggests that these lenders extract as much as $3 billion a year from low-wealth communities by charging triple-digit interest rates and repossessing the cars of delinquent borrowers.

Specifically, the report found that $2.2 billion is extracted through triple-digit interest single-payment and payday installment loans from borrowers with average annual incomes of approximately $25,000. Another $700 million is extracted through triple-digit interest car title loans that often end in borrowers losing their vehicle to repossession.

The CFPB found that 75% of payday lender fees are generated from borrowers with more than ten loans per year, demonstrating that these lenders rely on a business model of churning loans to borrowers who cannot afford to pay them off without reborrowing.

“The scale of this wealth extraction is troubling, with much of the $3 billion flowing through storefronts positioned in low-wealth communities. They are set up to systematically draw borrowers into the long-term cycle that underpins the predatory lending business model. But even this calculation is conservative as longer-term payday lending and online lending are burgeoning and much of that activity is not reported to state regulators,” said Charla Rios, deputy director of research for CRL. “Policymakers should cap annual interest rates at no more than 36% to stop the extraction of wealth from communities and consumers already struggling with financial instability. They should also pass laws to prevent predatory lenders from evading state consumer protections.”

Photo byDan GoldonUnsplash