33 Pages Posted: 13 Nov 2018
Date Written: March 1, 2014
In this Data Point we present the results of several analyses of consumers’ use of payday loans. The focus of the analyses is loan sequences, the series of loans borrowers often take out following a new loan.
Key findings of this report include:
• Over 80% of payday loans are rolled over or followed by another loan within 14 days (i.e., renewed). Same-day renewals are less frequent in states with mandated cooling-off periods, but 14-day renewal rates in states with cooling-off periods are nearly identical to states without these limitations. We define loan sequence as a series of loans taken out within 14 days of repayment of a prior loan.
• While many loan sequences end quickly, 15% of new loans are followed by a loan sequence at least 10 loans long. Half of all loans are in a sequence at least 10 loans long.
• Few borrowers amortize, or have reductions in principal amounts, between the first and last loan of a loan sequence. For more than 80% of the loan sequences that last for more than one loan, the last loan is the same size as or larger than the first loan in the sequence. Loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates.
• Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer. Among new borrowers (i.e., those who did not have a payday loan at the beginning the year covered by the data) 22% of borrowers paid monthly averaged at least one loan per pay period. The majority of monthly borrowers are government benefits recipients.
• Most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days. Roughly half of new borrowers (48%) have one loan sequence during the year. Of borrowers who neither renewed nor defaulted during the year, 60% took out only one loan.
The next section describes the data used in the analysis; subsequent sections describe the specific analyses and results exploring sequence durations, loan sizes and amortization, and loan usage over the year. An appendix discusses sampling issues and provides results from different sampling approaches.
Note: This is another in an occasional series of publications from the Bureau of Consumer Financial Protection's Office of Research. These publications are intended to further the Bureau's objective of providing an evidence-based perspective on consumer financial markets, consumer behavior, and regulations to inform the public discourse.
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