Cycle of Debt


The high cost and structure of a payday loan and auto title loans trap borrowers in a cycle of debt where they continually pay fees and interest—never paying down the loan. In spite of the short initial term of the loan, borrowers can be stuck paying for months on end paying fees every two-weeks to one-month averaging 23% of the loan principal.  At such high rates, it does not take long for the fees to add up to a damaging cycle of debt.

What is the Cycle of Debt?

Julia, who works in an elementary school cafeteria, got a $500 fast cash payday advance, because she was short on money for rent—she left the store with $500 in her pocket and a loan for $615 (the first $115 fee is rolled into the loan principal amount).   At the end of two-weeks, she went back to the loan store.  She didn’t have the full $615 she owed, so she paid $115 fee to rollover the loan for two more weeks.  Because money is tight, many working Texans, just like Julia rollover over their loans 5 or more times, and end up paying $1200 or more for what started as a short-term $500 loan. 

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Under current Texas law, there is no limit to the fees that payday lenders and auto title businesses can charge and no limit on the number of times they can charge high-fees for essentially the same loan.  Auto title loans are similar to payday loans, but the amount loaned is generally higher and a borrower who fails to make a payment could lose his means to get to work and take his kids to school.