Payday Loans in Any Package Bring Pain
As payday predators move to apps and "tips," borrowers remain caught in tangled web of debt
It’s no secret that taking out a payday loan can be a painful experience that hurts one’s financial standing and traps them in a seemingly never-ending cycle of debt.
One Tennessee borrower ended up paying back $14,000 on a $2500 flex loan.
Another report reveals it can take up to five months to pay off a single payday loan, with interest and fees averaging around $520 on top of the original loan amount.
Now, there are new players in the debt trap lending market. These are app-based lenders, known as fintechs (nonbanks that offer certain financial products). They have names like MoneyLion or SoLo Funds.
Based on Connecticut’s analysis of loans facilitated in the state, the typical principal amount was $100, with an average ‘lender tip’ of $21 and an average ‘donation’ to Solo of $10 — equating to APRs that ranged from 43% to as much as 4,280%.
While Connecticut’s Banking Commissioner took action against SoLo Funds and the legislature has said the state’s rate caps apply even to out-of-state, app-based lenders, some fintech lenders are still charging Connecticut borrowers over 300% interest on short-term loans.
A recent column in the Hartford Courant points out this injustice and calls on Gov. Lamont to take action:
Connecticut has strong laws against predatory lending that prohibit short-term payday loans with annual percentage rates, or APRs, over 300% that put people in other states in this kind of vicious cycle of reborrowing and debt. But the three men borrowed from cash advance apps that do operate in our state. Rather than going to a storefront payday lender, people are increasingly using their phones for these “earned wage” advances. The packaging is different but these products are similarly dangerous. Without strong legal protections, both regularly trap consumers in debt.
These new loans carry many of the same risks as payday loans but disguise their true cost using terms like “tips” to mask the fees associated with the loan.
Repayment from the next paycheck leaves people short for that month, so they often must borrow again. The fees may appear low but can pile up, including transaction fees and expedite fees, which, unsurprisingly, an overwhelming majority of borrowers pay to get money quickly. Data on several large lenders show that, on average, borrowers take out 36 loans a year and are charged fees equivalent to an interest rate of over 330% APR.
